Bridging finance is a short-term loan (typically 12 months or less) that provides an immediate cash boost. A bridging loan could be beneficial if you need a short-term loan or access to finance quickly. However, as with all commercial finance options, bridging finance does have some drawbacks.
Here’s a summary of the pros and cons of bridging finance.
Pros of bridging finance
Quick access to funds: One of the main advantages of bridging finance is its swift availability. Unlike traditional financing options, such as mortgages or business loans, which can take months to process, bridging loans can be obtained within a few days. This factor can enable businesses to proceed with their plans without waiting for a lengthy financing process to complete.
Versatility: Compared to traditional loans bridging finance offers greater flexibility. Typically, bridging loans can be used for any legal purpose, giving borrowers the freedom to allocate the funds as required.
Flexibility: Bridging loans generally offer flexible terms and conditions, enabling borrowers to tailor the loan to their specific requirements. Some offer the option to roll up the interest so there are no monthly payments during the loan term. Instead, the interest is paid at the end of the loan term when the loan is redeemed.
Minimal credit checks: Bridging loans are often secured against property or other valuable assets. Consequently, the borrower’s credit history may impact the loan approval process less. This factor can benefit businesses with less-than-perfect credit scores that need immediate access to funds.
Cons of bridging finance
Higher interest rates: Compared to long-term loans, bridging loans typically have higher interest rates making them more expensive in the short term. The higher rates are due to the short-term nature of the financing and the perceived higher risk.
Short repayment: Typically, bridging finance has a short repayment period, ranging from a few weeks to a few months. This can pressure borrowers to secure long-term financing or generate sufficient funds to repay the loan within the specified timeframe. Failure to repay the loan on time can result in additional fees or penalties.
Additional fees: As well as the higher interest rates, borrowers may face additional costs such as arrangement fees, legal fees, or valuation fees. These extra charges can impact the overall affordability of the loan.
Risk: A bridge loan is secured against an asset, such as a property, which is at risk of repossession if the borrower fails to repay the loan. If a borrower defaults on the loan, the lender can take legal action to recover the debt by selling the asset.
Unregulated: In the UK, commercial bridging finance is unregulated, meaning borrowers don’t have the Financial Conduct Authority (FCA) protection as they would with other forms of finance.
As with any type of commercial loan, it’s important to consider the pros and cons of bridging finance and evaluate your specific circumstances before choosing this type of short-term financing.
If you would like to know more about bridging finance, please get in touch.
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