I’m sure most readers of Fresh Business Thinking have heard of bridging finance but chances are that many of them aren’t overly familiar with it. That’s understandable as bridging will always be a relatively niche product. But it does seem to be getting onto more and more business owners’ radars.

In 2015, we saw a 17% increase in bridging loans being taken out for business purposes relative to 2014. That’s not an insignificant rise. But before we look at how bridging loans are being used by business owners, here’s a quick recap on what they are.

Bridging loans explained

A bridging loan, very simply, is a short-term loan, typically of between one and 12 months, which is used to provide the borrower with a temporary cash injection — something to get them from a Point A to a Point B (hence the term ‘bridge’). They can range in size from £50,000 to £50m or more.

Importantly, a bridging loan is always secured against a residential or commercial property. Equally importantly, there should always be what’s called an ‘exit strategy’ in place – in other words, a way for the borrower to pay off the bridging loan as it’s only ever a temporary solution.

Also, because bridging loans are generally arranged in rapid timescales and are normally only required for a short period, their interest rates are typically higher than a bank loan. But then what’s important to understand is that these loans are usually paid off within several months, making the real interest rate far less punitive.

Bridging uses for business owners

So how are business owners using bridging loans? To give you an idea, here are four examples:

  • A manufacturing client used a bridging loan of £1.75m to produce additional equipment to meet the rising demand for their product. They could have gone down the traditional bank route but that would have involved a far longer wait and lost sales. Instead, they took out a bridging loan secured against their commercial premises to quickly produce the new equipment and then paid off the bridging loan three months later when they received a term loan from their bank.
  • A small business owner was hit with a larger than expected corporation tax bill. She could have deferred payment of the corporation tax by a few months but wasn’t comfortable with that situation as it may have resulted in a red flag from the Revenue. Instead, she took out a £150,000 bridging loan secured against her residential property, paid her tax bill and then paid off the bridging loan two months later when she had remortgaged her home (she had significant equity in her property).
  • A retail client wanted to buy considerably more stock of an item that was selling very well but which they were soon to run out of. Once again, the loan – of just over £450,000 – was secured against the commercial property they owned and operated out of, and was paid back roughly five months later when they had sold the additional inventory at a significant profit.
  • A technology company had a temporary cash flow problem when a large client had IT issues and was unable to make its payment on time. The client needed to pay its staff and own suppliers and so the owner took out a bridging loan of £75,000 secured against his property, which he then paid off when the client eventually paid its overdue invoice.

Solving everyday business problems

Hopefully, the above examples will give you an insight into how bridging finance is being used by more and more UK business owners.

So why are we seeing this trend now? Well I think bridging finance, like many other forms of alternative finance, such as peer-to-peer lending and crowdfunding, is becoming a lot more trusted.

As a result, people are more comfortable looking at new ways to solve their everyday business problems — and bridging finance, quite clearly, is emerging as a useful financial tool.

By Myles Williams, Chief Executive, Fast Property Finance