Using bridging loans to support your cash flow enables you to overcome challenging periods and finance more ambitious projects. We examine what cash flow bridging loans can be used for and how to use them as part of your organisation’s growth plan.
Businesses of all sizes benefit from external financing. However, the UK business lending market has experienced unprecedented demand for ultra-short-term loans to support cash flow. It’s why the market is predicted to accelerate by 25% over the next five years.
Using bridging loans to support your cash flow enables you to overcome challenging periods and finance more ambitious projects. Understanding how they can be used presents another tool in your arsenal to achieve explosive growth, regardless of industry.
In this guide, we examine what cash flow bridging loans can be used for and how to use them as part of your organisation’s growth plan.
Can you use a bridging loan to help with cash flow?
Bridging loans are often associated with supporting property transactions, but they can be used to provide temporary support for constrained cash flows. Firms may need financing to “bridge” the gap until invoices are paid or to support non-recurring capital investments.
In fact, cash flow is cited as the most common reason for seeking external financing within the UK's business sector. According to one study, 69% of SMEs who borrowed money claimed their needs were cash-flow related.
However, remember that bridging loans are a type of secured loan, meaning they must be secured against an asset. In most cases, these high-value assets will be property. If you fail to repay the loan, your lender can sell the asset the loan was secured against to reclaim their funds.
Cash flow issues that a bridging loan could support
Bridging finance is designed to be a short-term solution that typically lasts no more than 18-24 months. Although £516 billion was lent to UK businesses in recent years, bridging finance still makes up a minority of this market, but bridging loans have experienced tremendous growth because of their flexibility.
Unlike the glacial pace of high street banks, bridging loans can be approved in just a few business days and may be used for any number of functions. Here are some of the ways the UK’s biggest brands use cash flow bridging loans today:
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How to use a bridging loan for cash flow
Using a bridging loan for cash flow is an intelligent way to overcome growth and profitability obstacles. Like any form of external financing, staying aware of the risks of using bridging finance enables you to determine whether it’s the best option for your business.
In terms of bridging loans, the main risks are losing your secured asset, higher interest rates and repayment pressures. In this step-by-step guide, we’ll use the example of Company X, an established FTSE 100 company.
Step one – Assessing the need
Company X begins by identifying a specific gap that requires short-term funding. The gap could have been caused by several delayed payments from the firm’s biggest clients. Alternatively, Company X may be looking to invest in a new production facility.
The firm will examine why they’re short on cash flow, how much they require, and how long they will need to repay the borrowed funds.
Step two – Leveraging assets
Since Company X is one of the UK’s largest companies, it has plenty of assets to secure the loan. One benefit of bridging loans is that companies of this size can borrow seven—and eight-figure sums with relative ease because they have the assets to secure such an amount.
Examples of high-value assets Company X may use to guarantee their cash flow bridging loan include:
Step three – Reaching out to lenders
Countless bridging loan providers exist within the UK’s bridging finance ecosystem. As Company X requires significant amounts to boost its cash flow, it will likely reach out to a lender specialising in large-scale bridging loans.
In many cases, it’s easiest to reach out to a bridging finance broker who can leverage their industry network to source the best deals. They will account for loan-to-value ratios, repayment terms, and interest rates.
Step four – Obtain and deploy funds
Approval for the cash flow bridging loan is provided within a few days, with the money arriving in Company X’s accounts soon after. Company X deploys these funds according to their previously identified cash flow gaps.
For example, they may need to plug a gap in their working capital to prevent other operations from being affected by their major customers failing to pay their invoices on time. Alternatively, Company X may have identified a high-ROI project requiring immediate liquidity.
Company X creates an oversight team during deployment to ensure that cash flow bridging funds are deployed in the most efficient way possible with a strict deadline.
Step five – Execute the exit strategy
Company X has already prepared its exit strategy to repay the loan. Typically, its exit strategy will be a sale, repayment, or refinancing. Which exit strategy Company X uses depends on the project.
In short, these exit strategies will encompass:
1. Sale – The firm sells an asset, such as a renovated property, and uses the proceeds to repay the loan.
2. Repayment – Since a temporary cash flow boost was needed to account for slow periods or non-paying customers, the firm repays the loan when the economic situation turns itself around.
3. Refinancing – In terms of a longer-term investment, Company X decides to refinance into a longer-term loan, such as development finance or a commercial mortgage, using the loan proceeds to repay the bridging loan.
Cash flow bridging loans are powerful weapons for businesses in today’s challenging, low-growth UK economy. With the help of Hilton Smythe, entrepreneurs can turn to our team for help sourcing the best bridging loans and aligning their goals with the appropriate financing solutions.
To learn more about how Hilton Smythe supports firms seeking bridging loans for cash flow issues, reach out to the team today.