Which type of bridge financing is right for your business?
Keep dry: bridge finance can protect your cash flow
The idea that bridge financing can only be used to purchase or renovate property is a common misconception. In fact, businesses can utilise bridging loans for a wide variety of purposes.
Bridge finance can prove useful when your company is in need of a speedy cash injection. It can be used to help you meet finance obligations in the short term and provide a vital cash flow boost while you wait for longer-term funding to become available.
As with any business loan, you’ll have to meet the lender’s eligibility criteria. You’ll also be asked for your business plan and exit strategy when you apply for bridging finance.
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Let’s take a look at the different types of bridging finance available today:
Closed bridge loan
A closed bridge loan has a fixed repayment date, which is usually a few months after you receive the finance. As the lender has a higher level of certainty in terms of when the loan will be repaid, closed bridge loans tend to be more accessible.
Open bridge loan
Open bridge loans, on the other hand, have no fixed repayment date. This can make them more suitable for borrowers who aren’t sure when they’ll receive the funds required to pay back the loan. For this reason, interest rates tend to be higher on open bridge loans.
First charge bridging loan
A first charge bridging loan is when the asset (e.g. property) that is used as security has no other loan against it. For example, the borrower may own it outright because the mortgage has been fully repaid. Bear in mind that if you default on the bridging loan, the lender can sell the asset.
Second charge bridging loans
As the name suggests, a second charge bridging loan applies when there is already a loan on the asset that is being used as security, such as a mortgage.
Debt bridge financing
If you want to take out finance as a temporary measure to cover short-term costs, you could apply for debt bridge financing. If you decide to take this route, be sure to find out exactly what interest you’ll pay on top of the repayments to avoid exacerbating financial challenges.
Equity bridge financing
With equity bridge financing, a venture capital firm provides the company with capital in the form of a bridge financing round to tide them over while they raise equity financing. The business may offer the lending firm equity ownership in exchange for the funds.
IPO bridge financing
Businesses can use bridge finance to cover costs associated with the Initial Public Offering (IPO) process, which can be expensive. The business uses the finance raised by the IPO to pay off the bridging loan and gives the underwriters shares at a discount on the issue price to offset it.
Are you looking for short-term business funding? If so, a bridging loan could be just what you’re looking for. If bridging finance isn’t quite right, you might be able to secure another type of finance, such as a start-up loan, revolving credit facility or invoice finance.
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