Bridging loans explained – a simple guide – Simply Business
A bridging loan for business is an alternative worth exploring if your needs are short-term.
youyMany small businesses require funding to help them get off the ground or reach their full potential. There are several financing options available to you, but the suitability of each is one of your company’s needs and current circumstances.
A bridging loan for business is an alternative worth exploring if your needs are short-term. This article will go over all you need to know about bridging loans in the United Kingdom.
What Is A Bridging Loan For Business?
A business bridging loan is a form of commercial loan that allows you to borrow money for a shorter amount of time than you might with a traditional bank loan, however, at a higher interest rate.
Enterprises in need of short-term finance often use bridging loans. In effect, they serve as a ‘bridge’ to a more long-term funding source for a business, such as a loan or sales revenue. For example, you may have invested in stock or property and need to bridge the gap between when your payment is due and when another source of money becomes available.
Bridging loans are typically easy to set up and may be easier to arrange than other types of financing.
How Does A Bridging Loan Work?
A bridging loan for a UK company requires the borrower (in this example, your company) to pledge assets as collateral. A property or piece of land is security; however, specific organizations may be able to utilize other high-value assets instead.
A lender will lend up to a particular percentage of the value of the collateral you furnish. The ‘loan to value ratio, or LTV, is this term. Most lenders give a maximum LTV of 75 percent.
The lender will charge interest on the loan, with the rate determined by the amount borrowed and the amount of risk the lender believes it is taking by making the loan. This amount of risk you normally need to determine for credit score and the present state of your firm; as a result, startups, and businesses that have had financial difficulties in the past may have difficulty obtaining credit or you may pay a higher interest rate on any money you borrow.
Usually, the entire loan amount plus interest is due at the end of the term; however, some lenders may accept interest-only payments every month. The best way to know about interest is to use a bridging loan calculator.
How Much Does A Bridging Loan Cost?
You can pick between fixed and variable interest rates, just like any other loan. The difference is that bridging loan rates one needs to calculate monthly, unlike other types of longer-term loans.
Since these loans you can take out for a shorter period of time, the interest rates can be extraordinarily high – ranging from 0.48 to 2% per month. It is not just the bridging loan interest rate that one has to consider. Depending on your lender, bridging loans may have additional costs and fees, such as:
- Facility fees or arrangement fees (this can be around 2 percent)
- Legal costs
- Fees for valuation
- Fees for bank transfers
- Brokerage Commissions
- Exit fees (can be a 1 percent charge at the end of the loan period
What Are The Types Of Business Bridging Loans?
- Retained: In a retained bridging loan, the lender keeps the interest for the whole term of the loan, so it is only paid in one lump sum in the last month. The total amount you will pay that you effectively estimate is as soon as the loan you take out. This may be more expensive in the long run, but it may be appealing because it eliminates monthly fees.
- Rolled-Up: Bridge finance that is rolled up is pretty similar. However, interest is added each month under this approach, so the total amount grows with time. However, this can be less expensive in the long run than taking out a retained interest loan.
- Monthly: A monthly bridging loan is the most affordable and straightforward solution, but it may not be appropriate for all firms. Interest needs to pay every month, so you’ll pay less over the duration of the loan. However, unlike the other two alternatives, you will be responsible for monthly payments.
Security Or Collateral Against Business Bridging Loans
When taking out a bridging loan in the UK, most businesses, like most individual borrowers, utilize property or land as security. However, this does not imply that you or your company must own a property in order to obtain bridging financing.
As security, you can utilize equipment, the value of unpaid invoices, or even the equity in your company. However, the amount you can borrow is determined by the value of the security you utilize, which is why expensive assets such as real estate are preferred.
Wrapping Up!
It’s important to note that bridging loans are a costly way to borrow money and are only meant to be used briefly. If you require a longer-term loan, you should consider other business loans or invoice financing.
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