Bridging Finance

What is bridging finance?

Bridging finance caters to those times when your business experiences cash flow challenges. You no longer have to worry about not getting paid on time. Most small businesses continuously face a myriad of financial obligations to meet.

When your customers settle their accounts late, or you’re in need of new inventory and have to pay salaries, your cash flow comes under severe strain. This is where bridging finance literally offers you a “bridge” to navigate your way through all these financial obstacles.

Using bridging finance for short-term relief

A bridge loan is a short-term offering to buy you some time to look for long-term business finance solutions. It’s working capital that enables you to continue with your activities. It’s the perfect option for when you need money in a hurry.

Bridging finance addresses the gap between running out of money and receiving funds. It offers short-term working capital to continue your operations. Bridging finance is, in essence, a cash advance.

The basics of a bridge loan

• The value of the property or asset you offer will determine the amount you can borrow.
• The lender will take your property/asset as security.
• If you default on your repayment your property/asset can be repossessed.
• You'll have to pay the required interest for the term of the loan.
• You repay the loan in full at the end of the agreed term.
• The onus rests on you to prove to the lender that you can receive funds. For example, if you need cash to buy goods, the lender will pay your supplier directly.
• Your full repayment will comprise the borrowed amount plus loan costs.
• Loan periods can vary from two weeks up to three years.
• It’s easy to apply as you can do it online and get feedback within a day. You only need to supply core information and documentation.
• The process is transparent as the lender will inform you exactly how much your repayment will be. The lender will also supply you with all the vital information you need such as upfront costs, fees, and the length of your loan term.
• Most lenders have online loan calculators to help you decide on the best bridging option for your business.
• You’ll have a choice of repayment plans. Lenders will consider your financial health and business requirements to structure a plan that suits your pocket.

Types of bridging finance for businesses

You can choose from purchase order finance, contract finance, or property bridging finance.

1. Purchase order finance

   When you’ve secured a purchase order contract you will need cash to deliver the ordered products to your client. Bridging finance enables you to do so without depleting your cash flow so you can continue operating your business.

2. Contract finance

   Contract finance closely resembles purchase order finance as it enables you to deliver materials and services before receiving payment.

3. Property bridging finance

   If you’re waiting for a property deal to go through, you can get a part of the selling price of your property in cash while awaiting your money from the sale. You can use this money as you see fit. Estate agents can also apply for bridging finance while awaiting their commission. You can even get bridging finance to pay your property taxes or transfer duties.

4. Commission bridging finance

   When your company gets a commission for services but has to wait until the work has been finished, this type of bridging finance will strengthen your cash flow.

5. Debtors’ book bridging finance

   If your debtors’ book shows you’re expecting a number of payments, you can apply for bridging finance against those outstanding monies.

Bridging the cash-flow divide

A bridge loan replenishes your business cash flow, allowing you to continue with essential operations.

The advantages of this type of finance

• You get your money much faster as you can apply online and approval can take as little as a day.
• You can continue doing sales to make a profit.
• It offers repayment options to suit your pocket
• There are no monthly installments.
• It gives you immediate financial relief.
• Bridging loans enable you to put your property to good use.
• Selecting the right lender is much easier than in the case of traditional lenders.
• Bridging loans mitigate financial loss.
• If you have a bad credit record you can still apply, as lenders might just request additional collateral.
• You can get a readvance and even a discount from some lenders if you repay your loan before the agreed term.
• Should you require a readvance, you can do so if you’ve made repayments on your loan for a specified number of months.
• Lenders allow a variety of payment methods, from EFTs to debit orders.

Disadvantages of bridging finance

• Bridging loans are very expensive as they charge higher upfront fees and rates.
• Because these loans are meant for the short term, lenders will set substantial interest rates.
• You’ll have to pay a charge fee of as much as 3% of the value of your loan.
• Lenders will ask for equity in your existing home/business if you put either up as collateral.
• Your business’ finances must be stable as most lenders require minimum credit scores and debt-to-income ratios.

No reward without risk

As with most things in life, there are a number of risks you should be aware of:

• It’s very important to check the fine print of your contract so as to avoid nasty surprises down the line. Because you need money urgently, you would be tempted to accelerate the process without making sure of all the finer detail. It’s advisable to approach a professional for advice.
• Getting in arrears with your repayments is a serious risk since the interest rates are usually high.
• Defaulting on your loan puts your asset at risk and can even lead to the liquidation of your company. The law’s on the side of your creditors and they have a range of legal options available to enforce repayments.
• Where property is involved, exit strategy failure is a serious threat, such as in cases where a sale falls through in a property deal. Your exit strategy is a vital part of the process. Here factors out of your control can have a negative influence on your loan application, such as the state of the housing market, to name but one. Always have a contingency plan ready so you’re able to extend the finance if necessary.
• Breaching your loan terms gives lenders the power to apply their own terms and conditions.
• Ensure that you have a sound exit strategy as this loan is only for the short term.

Requirements to qualify

• You'll offer the payment you're awaiting as surety for your loan.
• You’ll have to prove that you’ll be able to generate profit and achieve sustainable growth over the next year.
• If you’ve sold a property of which the transfer and registration are pending, you’ll have to produce a document to this effect.

Choose your lender

Because there are so many bridging finance lenders in the country to choose from you have to consider the following carefully:

• Determine exactly how much you need as you’ll be required to state the amount you want.
• Your trading history is important as some lenders will only consider you if you’ve been in business for more than a year.
• Decide which assets you want to borrow against. Remember that an appraisal will be done before your loan is granted.

Documentation for your application

1. Your business registration document.
2. Your company’s director(s) ID document(s).
3. Bank statements of the past 6 to 12 months.
4. The previous year’s annual financial statements.
5. The previous year’s management accounts.
6. If you apply for purchase order finance, more documents will have to be submitted.

Interest rates and loan costs

The regular bridging loan interest rate is anything from 0.47% to 1.5%, and 75% loan to value (LTV). If you have additional security, your LTV can escalate to more than a hundred percent.

It’s important to familiarise yourself with the early repayment policy of your chosen lender, as you might have to pay penalty fees when you repay your loan before its term has expired.

Monthly payments are calculated by taking the interest rate and initiation fees into account, as well as monthly costs. Because this is a short-term loan, the number of days you need the loan for will determine its cost.

Interest rate determinators

• The turnover of your business
• The state of your free cash flow
• The value of your assets
• How old your business is
• The type of bridging loan you need
• The number of directors and operators in your business

A lifebuoy in times of trouble

• If your company is in dire straits and you’re searching for a bigger investor, you can apply for a bridge loan. In this case, the lender will require a large equity position to eliminate his risk.
• A bridge loan can also carry a distressed company until its acquisition.

Going the traditional route

Traditional banks might need collateral or could dictate the use of your bridging funds. Banks that offer bridging loans are:

• ABSA
• FNB
• Nedbank

There are a great number of alternative lenders in the country that offer bridging finance to small businesses. Their application processes are also much quicker.

Your bridging finance questions answered

How much bridging finance can I get?

Lenders provide finance up to a prescribed Rand limit, depending on the number of your incoming funds. The size and liquidity of your business will also be determinators. You can apply for as much as R5 million.

How long does the bridging loan process take?

Banks first have to evaluate your request for financing. This can take up to 5 days. If you need cash fast, you should approach an alternative lender. The latter can release your funds within a day if you comply with all the requirements.

Is the bridging loan industry regulated?

Because a bridging loan is not regarded as a credit agreement, alternative lenders don’t need to register with the National Credit Regulator.

How long is the term for a bridging loan?

A bridge loan is a short-term loan repayable as soon as you receive the funds for which you required the loan. You can get a repayment plan of up to six months.

Do I need to make monthly repayments on my loan?

You’re allowed the flexibility to repay monthly interest on the loan so that you only have to settle the borrowed balance when your loan term expires.

What about my credit score?

Lenders don’t focus as much on your credit score as a commercial property finance provider would. The better your credit score, the more interest bridging-loan service providers will have in you.

Will I qualify if I’m blacklisted?

Each bridging finance application is judged on merit. You’ll be expected to show that you plan to pay all your debt by getting to an agreement with the companies or people you owe money.

Can I get bridging finance if I’m under debt review?

If you’ve committed to debt review, you can’t apply for bridging finance as you’re not allowed to enter into additional debt.

Summary of bridging finance for businesses

• There’s a wide variety of bridging finance options available to small businesses.
• Bridging finance enables you to source and explore valuable business opportunities.
• It’s advisable to approach professionals such as accountants and insurance experts for advice on the best option for your specific circumstances.
• Ensure that you understand all the bridging terms and fine print of your loan contract.
• Decide beforehand on a solid and workable exit strategy.

A bridging loan is a workable solution to prevent financial loss. It allows your business to run smoothly in the face of adversity. The right lender will consider your unique financial situation carefully and design an option that’ll take a huge weight off your shoulders in the short term.