Business bridging loans provide short-term capital to companies for anywhere from a month to up to three years. We discuss the security aspect of bridging loans to give you a better understanding of what’s required.
Business bridging loans provide short-term capital to companies for anywhere from a month to up to three years. They can fill those temporary funding gaps and meet your obligations. Typically, these are secured loans, meaning they must be secured against some form of asset.
With more players in the UK bridging loans market than ever, the market as a whole is expected to grow 25% in the next five years as more firms seek quicker and more flexible financing options. In this guide, we discuss the security aspect of bridging loans to give you a better understanding of what’s required.
Secured vs. unsecured bridging loans
Debt is often a reality for companies as it’s the tool for achieving growth. All loans are a double-edged sword, with over 630,000 UK firms reporting “significant financial distress”, with much of this debt coming from unsustainable borrowing due to the COVID-19 pandemic.
If you’ve taken out a secured loan and cannot meet your repayments, assets used to secure said loan are at risk. Unsecured loans can also put your assets at risk, but there’s no direct connection between the loan and a specific asset.
In terms of bridging finance, the nature of this type of borrowing means that there’s no such thing as an unsecured bridging loan. All bridging loans are secured against some form of asset.
What is a bridging loan secured against?
Bridging loans must be secured against a high-value asset to ensure the lender can recover their money if you fail to repay the loan at the end of your term. Typically, the most common security is a property, but businesses with high-value land may also be able to offer this as an alternative to a property.
Other forms of collateral lenders may accept include:
Not all lenders will accept alternatives to traditional forms of collateral. If you’re preparing to offer something other than property or land, speak to the lender first to find out what types of collateral they’re willing to accept.
It’s also worth mentioning that bridging finance, particularly if it’s unregulated, can provide loans worth millions of pounds. You’ll be expected to cover a particular percentage of the loan in the form of security. Lenders may accept multiple forms of collateral to approve your loan.
For example, suppose you’re borrowing a few million pounds. In that case, you may be able to offer multiple properties, land, or even equity in your business as a condition of getting your loan approved.
Speak with the Team About Bridging Finance
Do you need security for a bridging loan?
Security is required for all bridging loans. Bridging finance must always be secured against one or more assets, meaning that you won’t be eligible for this type of lending if you don’t have something you can put up.
If you’re unwilling to put up collateral to secure your loan, it’s worth exploring other options, such as conventional business loans or relying on your business credit cards.
Is a secured bridging loan right for my business?
Bridging finance can make sense for your business, but like all loan types, they’re not for everyone. Understanding your needs and what taking out a bridging loan will mean for your firm’s finances is critical. Likewise, understanding the value of this type of loan will empower you to make the correct decision for your company.
Ask yourself the following questions to determine whether bridging finance is right for you.
Do I need financing quickly?
Bridging loans are prized for their speed. You can secure bridging funds in around a week, and some lenders may even approve your application even faster if you’re willing to pay higher rates.
Businesses seeking to take advantage of time-sensitive opportunities, such as purchasing assets at auction, are prime candidates for bridging loans.
Am I willing to provide collateral in exchange for a bridging loan?
Crucially, bridging loans require collateral as a condition of approval. If you’re unwilling to put up any assets as security, these are not the loans for you. Consider the worst-case scenario of losing a particular asset if you cannot repay your bridging loan.
Do I have a viable exit strategy?
Bridging loans are repaid in full at the culmination of your term. Interest payments may be made monthly or rolled up and repaid alongside the loan principal. These loans are short to medium-term options, meaning you’re operating on a tight timeline. Do your financial plans enable you to meet that timeline?
Typically, there are two primary exit strategies. You either sell the finished asset you used the bridging loan for, such as a refurbished property, or you refinance out of your bridging loan and into a longer-term solution, such as a traditional mortgage or business loan. You can read more about bridging loan exit strategies in our dedicated blog.
Does your business need a secured bridging loan?
Security is mandatory when applying for a bridging loan. No lender will entertain an application without it because that’s the price for providing quick, flexible financing. Whether you’re using a loan to purchase a property, cover outstanding HMRC liabilities, or finance a business acquisition, bridging finance can get you there.
At Hilton Smythe, our team of financial brokers provides all the support you need to acquire a bridging loan that matches the needs of your business. Take advantage of our vast network and secure the best rates. To learn more about how we can help, speak to the team now.