Bridging finance is a short-term loan aimed at filling a temporary cash shortfall. While businesses most commonly use it, it’s also used by individuals who need money to pay bills, cover rent, or cover a deposit on a new home.
The key is that bridging finance isn’t used to fund projects or other long-term undertakings. Instead, it’s intended to cover a specific, time-limited expense. Bridging finance is also known as a “working capital loan” or “short-term funding”.
Today, let’s take a closer look at bridge loans and whether or not it’s a good idea. If so, when is the best time to use it? Read on to find out.
What are Bridge Loans?
A bridge loan is a short-term loan typically repaid within six months. It’s bridge finance because it’s used to “bridge” the gap between a loan you’ve taken out and the arrival of cash from a business or investment deal.
It’s unsecured, which means it’s not secured against the borrower’s assets. This means it isn’t classed as a loan but rather a personal loan. Businesses who use bridge loans usually need to close a deal with a cash purchaser (such as a business buyer or other investment) or need funding from a bank.
To cover the gap between these two events, they need to borrow from a bank or an alternative lender to cover the gap between these two events. Business bridge loans are usually unsecured and can be repaid on demand.
Who Needs a Bridge Loan?
Bridge loans are perfect for businesses or individuals who need to bridge the gap between getting funding and receiving payment. For instance, a company may be planning to sell off its assets at a fixed price, such as at a liquidation event.
The buyer has agreed to purchase the assets but has yet to pay the total amount. The business owner knows they will have to pay the loan off at a later date, but they need to cover the gap between the time of the sale and the time their business receives the payment.
Similarly, an individual may need to buy a new car but doesn’t have the deposit required. The car company is willing to make a payment on the vehicle over a longer period. However, the individual needs a deposit to secure the agreement – what’s the best solution to this problem? A personal loan to cover the cost of the deposit.
When is the Right Time to Get a Bridge Loan?
Bridge loans are also used by businesses who have been rejected for bank funding but may have some form of credit from a previous venture that’s been paid back.
The third common use for a bridge loan is buying or investing in a property. This is something that most individuals do at one time or another, and bridging finance is usually the only way they can do it when they don’t have the deposit or the income to back it up.
Other Uses for a Bridge Loan
Aside from their usual purpose, bridge loans are also often used to take out a loan when the borrower is not registered on a government register for obtaining loans.
This includes self-employed people who don’t have the income to prove that they can make the payments on a loan. It’s a very useful type of finance to those who can’t get a loan through more traditional methods. That makes it a beneficial product for many people.
The Bottom Line
If you can’t get a bank loan or want a small unsecured loan, then a bridge loan could be the answer. However, it’s best to consider all the options before applying for one.
In some instances, it can be worth looking for other ways to fund your bridging finance, such as asking for a larger loan from your bank or trying for an overdraft if you can prove you can afford it. In short, before you get a bridge loan, it’s best to fully explore your other options first.
If you are looking for a mortgage in the UK, we can help you. A Move Brokers comprises a team of professional advisers who can help you with your specific mortgage and protection insurance needs. Our goal is to help our clients find the best solution to their problems through a wide range of products and professional advice. Book a free consultation with us today and find the best bridge mortgage today!