September 24, 2020

Types of Bridge Financing – Key Terms Explained

Although bridging finance is commonly used for buying and renovating property, it can also be used by business owners for a range of other purposes. Bridging loans aren’t as niche as they used to be and business owners consider them when they require a quick cash injection. As with any loan, eligibility criteria applies and you’ll need to present a business plan and exit strategy when you apply for one.

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A bridge loan can be used to fulfil existing financial obligations while longer-term financing is secured; it provides a speedy cash flow boost when funding is not yet available. Interest rates on bridge loans are relatively high and loans are secured using collateral such as business inventory or property. Both individuals and businesses can access it.

 

Bridge finance definitions

 

Closed bridge loans

A closed bridging loan is available for a fixed period of time (usually a few months) that is agreed by the lender and borrower. Closed bridging loans tend to be more accessible because the lender has a higher level of certainty when it comes to repayment of the loan. 

 

Open bridge loans 

Open bridge loans have no fixed date for repayment. As such, they can be a desirable option for those who don’t know when they will be accessing the funds needed to pay off the loan. Interest rates tend to be higher because of the higher level of uncertainty around the repayment. 

 

First charge bridging loans

A first charge bridging loan is when the property/asset that is being used as collateral has no other encumbrance; for instance, it might be fully owned by the borrower because the mortgage is fully paid off. If there is a default on the bridging loan, the bridging loan lender can sell the property.

 

Second charge bridging loans

A second charge bridging loan is generally for those who require finance but have a mortgage on the property that is being used as collateral. In other words, the asset already has a ‘first charge’ on it.

 

Debt bridge financing

Debt bridge financing is when a business takes out temporary finance to cover short-term costs while it waits for finance. The loan is like a bridge in the sense that it connects the borrowing company to debt capital. If you decide to take out a debt bridge loan, it’s important to understand what interest you’ll be paying as you don’t want to exacerbate any existing financial difficulties.

 

Equity bridge financing

Understandably, some companies want to avoid high interest debts so decide to seek out equity bridge financing. This is where a venture capital firm provides the company with capital in the form of a bridge financing round to tide them over while they raise equity financing, for example. 

The borrowing business may decide to offer the lending firm equity ownership in exchange for the funds. The investor(s) will base their decision to lend on whether or not they think the business will become profitable, increasing the value of their stake in it.

 

IPO bridge financing

When it comes to investment banking, bridge financing is a way for companies to get finance before their Initial Public Offering (IPO). The IPO process can be expensive, so the bridging finance is designed to cover the expenses in the short-term.  The finance raised from the IPO is used to pay off the loan, which is typically provided by the investment bank that is underwriting the new issue. The borrowing company gives the underwriters shares at a discount on the issue price, thus offsetting the loan.

If you’re interested in finding out more about bridging finance or want to see what you might be able to get, you’ve come to the right place. Let us know how much finance you need and what it’s for. We’ll get back to you with a business loan quote that won’t affect your credit score. 

 

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