Everything you need to know about commercial finance.
Modern commerce is a fast-moving, fast-paced world, and the ability to quickly seize and close a deal is what makes the difference between a business becoming successful or not. Without the financial agility to adapt to changing circumstances it’s impossible for businesses to grow and expand, so a stable source of finance is a necessary prerequisite for any company that wants to enlarge its market share. Commercial finance is a highly competitive sector, and the many lenders operating within it are constantly evolving to offer ever-higher standards of service and financial security to their clients. Some of the most innovative and versatile commercial finance providers are bridging lenders that specialise in commercial funding, who are able to offer a wide variety of high-quality loans to businesses in almost any sector.
In this article, we’ll discuss what makes bridging loans such an appropriate source of finance for growing businesses, and the ways in which a bridging lender can help companies expand with speed and stability. We’ll cover the main principles of a bridging loan and highlight the key areas of interest for anyone considering this form of finance; anyone considering a loan of this type should consult their financial advisor before proceeding further.
In order to properly understand what makes bridging loans a powerful tool for commercial finance, we’ll first need to understand the driving forces behind commercial finance in the first place. The underlying concept is quite straightforward, but as with all financial products there is an enormous amount of variation within the market and no two businesses are ever quite the same.
Any growing business needs to have access to substantial sources of funding in order to continue expanding. Without the ability to draw on reserves of capital, businesses will struggle to reach new opportunities, and this is especially true in new businesses; these companies typically need to carve out a piece of the market for themselves quickly or risk falling behind their competition. However, a business which is trying to grow quickly is also the type which is unlikely to have much capital on hand with which to finance it - with every pound being ploughed straight back into the business already, there is little left over to fund expansion.
Let’s examine an example of a situation where commercial finance could come in handy. A small business has been up and running for 3 years now, and although they’ve managed to make headway in the market and develop their customer base they’re still paying off their start-up costs (lease agreements on premises, equipment and so on). All the profits they make are put straight back into the company in the form of staff training and equipment upgrades, so although there’s little capital on hand they are both meeting ongoing costs and developing their business.
An opportunity arises for the business to purchase new premises from a property developer, which would give them much more space to work in and potentially the ability to fulfil larger orders from their clients, leading to new and greater sales opportunities. They will, however, need to purchase the property quickly, and as a new business with little in the way of positive credit history, they’ll find it difficult to secure funding through traditional finances (such as a mortgage). Clearly, a solution is necessary which enables this small business to secure the premises they need in order to expand, without needing to work through the lengthy process of obtaining a mortgage.
In order to properly understand what makes bridging loans a powerful tool for commercial finance, we’ll first need to understand the driving forces behind commercial finance in the first place. The underlying concept is quite straightforward, but as with all financial products there is an enormous amount of variation within the market and no two businesses are ever quite the same.
Any growing business needs to have access to substantial sources of funding in order to continue expanding. Without the ability to draw on reserves of capital, businesses will struggle to reach new opportunities, and this is especially true in new businesses; these companies typically need to carve out a piece of the market for themselves quickly or risk falling behind their competition. However, a business which is trying to grow quickly is also the type which is unlikely to have much capital on hand with which to finance it - with every pound being ploughed straight back into the business already, there is little left over to fund expansion.
Let’s examine an example of a situation where commercial finance could come in handy. A small business has been up and running for 3 years now, and although they’ve managed to make headway in the market and develop their customer base they’re still paying off their start-up costs (lease agreements on premises, equipment and so on). All the profits they make are put straight back into the company in the form of staff training and equipment upgrades, so although there’s little capital on hand they are both meeting ongoing costs and developing their business.
An opportunity arises for the business to purchase new premises from a property developer, which would give them much more space to work in and potentially the ability to fulfil larger orders from their clients, leading to new and greater sales opportunities. They will, however, need to purchase the property quickly, and as a new business with little in the way of positive credit history, they’ll find it difficult to secure funding through traditional finances (such as a mortgage). Clearly, a solution is necessary which enables this small business to secure the premises they need in order to expand, without needing to work through the lengthy process of obtaining a mortgage.
Bridging loans are ideally suited to meet this demand for fast and flexible finance in commerce because bridging lenders are able to work quickly to provide funding in almost any situation. A bridging loan is, generally speaking, a high-value loan with a short term of fewer than 12 months, secured against the borrower’s assets. In many cases bridging loans may be provided in as little as 7 days, which allows them to offer clients an exceptionally fast service; this in turn empowers their borrowers to act quickly and confidently, which is vital for success in the business world.
The flexibility of a bridging loan is also enormously important for many borrowers, because these loans may be used for almost any purpose. As outlined above, a common usage of bridging loans is to secure a property quickly without the use of a mortgage, but bridging lenders also provide a wide variety of alternative financial solutions that can help businesses meet their business goals. For instance, many lenders specialise in flexible lending products such as invoice discounting, which lets businesses convert goods sold into cash immediately with no lengthy wait for payment. Another innovative financial product is offered by some bridging lenders, and is known as a “revolving trading facility” - this acts as essentially a large overdraft facility for businesses, which they can draw on to meet costs as necessary. Because this allows businesses to instantly access funds without arranging a new loan, this form of finance is exceptionally flexible and can be an important part of a business’s financial strategy.
As a form of secured finance, bridging loans use the borrower’s assets as collateral. This means that if the borrower should fail to meet their repayment obligations, the lender will be entitled to reclaim the cost of the loan by repossessing and selling their assets. In practise, this rarely happens; most borrowers will simply take out a second bridging loan to cover the first, rather than lose their assets, but it’s an important consideration when bridging finance may be used. Bridging lenders must also consider whether their borrowers are likely to be able to meet repayments and as such will need to ascertain what their borrower’s “exit strategy” is. An exit strategy is how the borrower intends to repay their loan, and in the case of commercial property finance typically consists of a long-term financial solution such as a mortgage.
Commercial bridging loans are, as their name implies, bridging loans that are secured against commercial property.
There are many ways in which businesses can use a commercial bridging loan. Common uses are to cover short-term cashflow issues or to finance tax liabilities. More positively they can be used as working capital and by new businesses as a cashflow injection to acquire additional stock or even to acquire new equipment or premises for the business. Beyond these examples there are a huge variety of ways in which commercial bridging loans can be used.
To qualify for a commercial bridging loan the overall use of the property being used as collateral will need to be at least 40% commercial. For example, if the property is a rental unit with a flat above the commercial part of the property would have to represent more than 40% of the total property. Furthermore, most lenders would also insist on a separate entrance to the flat.
Yes. They can be a great tool for landlords who want to do renovations on their properties to improve rental yields. The value of the properties will also reflect these property improvements and make it easier for the landlord to refinance them onto competitive Buy-to-Let (BTL) mortgages and clear any bridging. Like residential bridging, commercial loans can also be useful when a property chain is broken.
Yes. Absolutely. They can be very useful in both the above instances and to solve a variety of other problems.
Yes. Whilst not as widely available as 1st Charges some lenders will happily write 2nd charge commercial bridging loans.
Yes they can. They can be used by a huge variety of companies and by foreign nationals who can struggle to get High Street Finance.