Cashflow is essential to the success of any business. But it doesn’t always flow as fluidly as it should. Late payments from customers, stock purchases, and unexpected loss of earnings such as those caused by the pandemic and subsequent lockdowns can all lead to short-term cash flow problems, so how do business stay afloat?
One of the easiest ways to bridge the gap between receiving cash and making payments is with a bridging loan, but is it right for your company? In this guide, we’ll explain how you can use bridging finance for business cash flow, along with the pros and cons of this type of plan.
What Is Bridging Finance?
Bridging finance is a short-term loan that can help span the gap between money coming into your business and money going out. Also referred to as bridging loans, this type of finance is common in property transactions when buying a new house before an existing one sells. But you can also use it to overcome cash flow problems in the workplace as an alternative to credit cards and overdrafts when you need money fast.
Bridging loans typically run for 12-months (although some lenders offer 24-month plans), and they may be unsecured or secured on your business premises or residential property. You can borrow anywhere between £25,000 to £2m depending on your credit rating, and you could receive the funds in your account in just 72-hours.
As lenders only have a short period to make money on bridging loans, interest rates are higher than long-term lending options, with average interest charges ranging between 0.2% to 2.0% per month. There are also arrangement fees, legal fees, and surveyors fees to consider, and some lenders also charge exit fees, so calculate all costs before you commit.
Using Bridging Finance for Business Cashflow
One of the significant benefits of bridging finance is that it takes just one or two days to arrange, and you’ll get a cash lump sum to spend on whatever you like. This makes it ideal for covering short-term cash flow problems in the workplace and raising capital for expansions, acquisitions, and new marketing strategies.
Here are just some of the ways you can use a bridging loan to bolster your business finances:
To Support Your Business During The Pandemic: With the end of lockdown in sight, you could use a bridging loan to get your business back on track when you can finally open your doors to the general public later this year. You can use any funds you receive to buy new stock, re-employ or re-train staff, or make your business Covid-compliant with safety screens, sanitiser stations, PPE, etc.
To Secure A New Account: If you need additional funds to secure a new account, bridging finance could be a perfect choice. It’s must faster to arrange than a traditional mortgage or fixed-term loan so you can stay one step ahead of the competition, and it will help you cover the gap between securing the contract and getting your first invoice paid.
Paying Your Corporate Tax Bill: If your tax bill is higher than you anticipated, a bridging loan can help you stay on the right side of HMRC without dipping into the cash you need for the day-to-day running of your business.
Buying New Business Premises: If you want to upgrade or downsize your business premises, bridging finance will help you bridge the gap between selling your existing property and buying a new one. Specifically designed for this type of transaction, bridging loans give you the freedom to buy at an auction or secure new premises at a discount price as a cash buyer.
Pay Outstanding Invoices: If you have fallen behind on your invoices, a bridging loan can help you get back on good terms with your business partners. You can also use it to keep your company afloat while waiting for customers to settle their outstanding invoices.
To Set Up A New Business: Bridging finance can help you get a new business up and running by providing essential cash flow during your first year. While you need to have a clear exit strategy of how and when you can repay the loan, it could be the perfect solution if you have guaranteed contracts in the pipeline and you need a cash boost to get started.
To Expand Your Existing Business: If you need to raise finance quickly to expand your business, a bridging loan could be a perfect choice. It will provide you with the funds you need without compromising your cash flow, so you can take advantage of any property deals or stock discounts and employ new team members with confidence.
You can use bridging finance for business cashflow in many different ways, but you should remember that this is a short-term solution, and you should only enter into it if you are confident you can repay it in time. Speak to a financial advisor for top tips on securing the right bridging loan for your business.