11 Uses of Bridging Finance in Business
What are the most common uses of bridging finance in business?
In this article we explore all the common situations where finance needs to be raised in a business in the UK and whether bridging finance is suitable to bridge that gap.
There are numerous situations in which businesses in the UK may need to raise finance to support their operations, growth, or specific initiatives.
What does bridge mean in business?
In the business context, the term "bridge" is commonly used to refer to a financial solution or strategy that helps to fill a temporary gap or address a specific need during a transition period.
Business Bridging Financing, also known as a business bridge loan, is a short-term loan typically used to provide immediate funding or liquidity to individuals or businesses.
It "bridges" the gap between the need for immediate funds and the availability of a long-term financing solution. Business bridging finance is often used in real estate transactions, mergers and acquisitions, or during periods of financial restructuring, however there are 11 common situations where it can be leveraged.
The top 11 uses where businesses seek to raise finance
The top 11 uses where businesses seek to raise finance are:
- Start-up Funding: New businesses often require financing to cover initial setup costs, purchase assets, conduct market research, develop prototypes, and establish their operations.
- Working Capital: Businesses may require additional funds to manage day-to-day operations, including purchasing inventory, managing cash flow gaps, covering payroll, and meeting operational expenses.
- Expansion and Growth: When businesses are looking to expand their operations, enter new markets, launch new product lines, or scale their activities, they may need financing to fund the expansion plans.
- Equipment and Machinery: Businesses may require financing to purchase or lease equipment, machinery, vehicles, or technology that is essential for their operations. This could include manufacturing equipment, office furniture, IT infrastructure, or specialised tools.
- Research and Development (R&D): Companies engaged in innovation and R&D activities may seek financing to support the development of new products, technologies, or processes. This can include funding for research, trials, testing, and patent applications.
- Marketing and Advertising: Businesses often require financing to invest in marketing and advertising campaigns to promote their products or services, build brand awareness, attract customers, and expand their market reach.
- Acquisitions and Mergers: When businesses are considering acquiring another company or merging with another entity, they may need financing to fund the acquisition or merger costs, conduct due diligence, and integrate the acquired business.
- Restructuring and Turnaround: In challenging financial situations, businesses may require financing to support restructuring efforts, implement turnaround strategies, or address financial difficulties. This can include refinancing existing debt, negotiating with creditors, or injecting capital to stabilise the business.
- International Expansion: Businesses looking to expand globally may require financing to establish overseas operations, enter new markets, build distribution networks, or adapt their products/services to foreign markets.
- Property Purchase or Lease: Businesses may seek finance to acquire or lease commercial property for their operations, such as office spaces, retail stores, manufacturing facilities, or warehouses.
- Management Buy Outs: Management Buy Outs (MBOs) are another common situation where finance needs to be raised in a business.
Can bridging finance really finance each of these scenarios?
Yes, bridging finance can be used to finance almost any business purpose - including each of the examples given. The common loan characteristics that each of these scenarios require are:
- Speed: In business inaction costs opportunity and speed of decision making can make or break a business.
- Size: The reasons why businesses seek out finance is to cover large gaps in financing that serve a strategic or tactical purpose.
- Accessibility: Businesses typically lack immediate access to large funds to maximise an opportunity or solve a mission critical issue, even if they do have cash tied up in assets.
It's important to note that the specific financing needs of a business can vary depending on its industry, size, growth stage, and individual circumstances.
Each situation may require a tailored approach to identify the most suitable financing options, which could include bank loans, business grants, equity investment, crowdfunding, asset finance, trade finance, or other alternative funding sources.
Does using Bridging Finance for a business make good business sense?
Using bridging finance for a business can make good business sense in certain situations, but it depends on the specific circumstances and needs of the business.
Here are some factors to consider when evaluating whether bridging finance is a suitable option:
Short-Term Funding Needs: Bridging finance is designed to provide short-term funding to bridge a financial gap. If your business requires immediate capital to seize a time-sensitive opportunity, such as a property purchase, inventory acquisition, or project funding, bridging finance can be a useful solution.
Quick Access to Funds: Bridging finance typically offers faster approval and disbursement times compared to traditional bank loans. If your business needs funds urgently and cannot afford a lengthy protracted application and approval process, bridging finance can provide a quicker solution.
Flexibility: Bridging finance can be more flexible in terms of eligibility criteria and collateral requirements compared to traditional bank loans. This can be advantageous for businesses with unique circumstances or those unable to meet stringent bank loan criteria.
Temporary Cash Flow Gaps: If your business is experiencing temporary cash flow gaps due to delayed payments from customers or unexpected expenses, bridging finance can help cover those short-term financial needs until cash flow improves.
Property-Related Transactions: Bridging finance is commonly used for property-related transactions, such as property purchases, refurbishments, or auction purchases. If your business operates in the real estate sector or has property assets, bridging finance can provide the necessary funding for such ventures.
Exit Strategy: It is crucial to have a clear and viable exit strategy in place when using bridging finance. This includes identifying how you will repay the loan, whether through refinancing, the sale of assets, the completion of a project, or other means. Failing to have a solid exit strategy can lead to financial difficulties when the bridging loan term expires.
Cost Considerations: Bridging finance often comes with higher interest rates and fees compared to traditional bank financing. It is important to evaluate the cost implications and ensure that the potential benefits of accessing quick funds outweigh the associated costs.
Final thoughts
Ultimately, the decision to use bridging finance for a business should be based on a thorough assessment of the specific financial needs, risks, and opportunities.
It is advisable to consult with financial advisors or specialists in bridging finance to evaluate the suitability and viability of this funding option for your business.