A guide to bridging loans for business

Many small businesses need business financing either to help them get off the ground or to fulfil their potential. There are several finance options you can choose from, but the suitability of each will depend upon the needs of your business and its current circumstances.

If your needs are short-term, a bridging loan for business is an option worth considering. Here, we look at everything you need to know about bridging loans in the UK.

What is a bridging loan for business?

A business bridging loan is a type of commercial loan that allows you to borrow money over a shorter period of time than a typical bank loan, though often at a higher rate of interest. 

Bridging loans are typically taken out by businesses that need short term funding - you might, for example, have invested in your stock or property and have a gap between payment falling due and another source of funding becoming available to you. 

In effect, they’re a ‘bridge’ to a more permanent source of finance for a business, whether that’s a loan or income from sales.

Bridging loans can usually be set up relatively quickly and may be simpler to arrange than other forms of finance.

How does a bridging loan work?

A bridging loan for a UK business requires the borrower (in this case, your business) to put up assets as security against the loan. Typically, this security will be a property or land, but some businesses may be able to use other high value assets instead.

A lender will provide up to a certain percentage of the value of the security you put up. This is known as the ‘loan to value’ ratio or LTV. The maximum LTV offered by most lenders is 75%.

The lender will charge  interest on the loan, the rate of which is based on the amount borrowed and how much risk the lender believes it is taking on by offering the loan. This level of risk is usually based on your credit score and the current circumstances of your business - this is why startups or businesses that have had financial trouble in the past can find it hard to get credit or might be charged a higher interest rate on any money they borrow.

Normally, the full amount plus interest is repayable at the end of the loan period, although some lenders will also take so-called interest only payments every month. There are also monthly bridging loans, which are explained below.

What can a business bridging loan be used for?

A business bridging loan can really be used for anything. But because they are short-term loans and can cost more than other forms of financing, they are generally used for major purchases such as property. A business might also want to use a bridging loan to cover running costs or pay for a large amount of stock which it will later sell on to customers.

What is the cost of a business bridging loan?

As with most forms of borrowing, the cost of a business bridging loan can vary and depends on a number of factors, including the size of the loan and the time over which it will be repaid. But lender rates tend to be higher than for other borrowing.

A typical lender will charge between 0.5 to 1% per month. They may also charge arrangement, valuation or other administrative fees. It is also important to be aware of the different types of bridging loan available, and how charges are calculated for each.

What types of business bridging loans are there? 

There are three main types of bridging loan:

• Retained - Under a retained bridging loan structure, the lender retains the interest for the full length of the loan, so it is only paid on the last month as a single lump sum. Effectively, the full amount that you will pay is calculated as soon as the loan is taken out. This can work out more expensive overall but may be attractive as it means you will not face monthly costs.
• Rolled up - Rolled up bridge financing is very similar. But, under this model, interest is added each month and so increases every time. However, overall this can be less expensive than opting for a retained interest loan.
• Monthly - A monthly bridging loan is the cheapest and simplest option, but may not be suitable for all businesses. Here, interest repayments are paid every month, meaning you end up paying less over the course of the loan. But, unlike the other two options, this means that you are liable for monthly payments.

How long does a bridging loan last?

A bridging loan is designed to be a short-term form of business financing. They can last from anything from one month to three years, but most lenders won’t offer bridging loans that are longer than 12-18 months.

What are the pros and cons of a bridging loan?

The main advantage of a business bridge loan as a form of financing for your business is that it can be arranged quickly. A bridge loan is also often more flexible than other small business funding options, as borrowers have some control over repayment options.

But bridging loans are also typically more expensive than longer-term alternatives (although increased competition is driving prices down). Also, because they are unregulated, bridging loans can sometimes come with a number of hidden charges.

What can be used as security against business bridging loans?

Most businesses - like most individual borrowers - use property or land as security when taking out a bridging loan in the UK. However, that does not mean you or your business has to own a property to access bridging finance.

You can also use equipment, the value of unpaid invoices or even the equity held in your business as security. It should be noted, however, that the amount you can borrow is dependent on the value of the security you use, which is why expensive items like property are preferable.

What are the alternatives to bridging loans?

There are of course many alternatives to bridging finance for your business, depending on what you need the funding for. 

If you own a property outright that you are using as security against a bridge loan, you could instead take out a commercial mortgage. This could work out cheaper but tie you in to a much longer arrangement with a lender.

Other options for short-term borrowing include invoice financing or development financing. You could also ask your bank about arranging a shorter-term business loan. 

How to find a business bridging loan with Bionic

At Bionic, our team of business finance experts know exactly how to find the right product to help your business achieve its potential.

If you decide that a bridging loan is for you, we can use our smart technology to match you with the best deals on the market. We can take all the stress out of arranging and processing your loan while keeping you informed about the progress of your application.

All we need from you to get started is your business name and postcode, so we can guide you every step of the way.