Bridging the gap over cash flow crises

“Almost one in six UK small businesses in a recent survey said they are ‘very’ concerned about managing cash flow effectively over the next 12 months. A quarter of these businesses cited late payments as the main cause of cash flow problems.*

“This is an enormous pressure for small businesses to face and over the past two years many SMEs have turned to bridging finance as a solution to cash flow issues.

“Historically, bridging finance has been associated with investment opportunities but the market is widening and more firms are taking out short term loans to aid cash flow. Nowadays it’s a necessary resource for business owners as clients are generally taking longer to pay bills.

“For companies that have a strong reserve of equity in either their business premises or another property, short term funding secured against commercial or residential investment property remains one of the quickest and simplest ways to draw down capital.

“Provided that a business is basically in good health, a short term injection of loan capital can often be sufficient to allow it to continue operating without undue disruption until income streams have stabilised, as well as help refocus the business plan to longer term growth rather than survival.”

Much like going to a bank to apply for a business loan, there are a number of elements you need to prepare before approaching a short term lender for a bridging loan.

1. The amount
Think carefully about the amount you will need, it’s important to be realistic. With a bridging loan you can borrow anything from around £30,000 to £3million. Don’t over stretch yourself, but don’t under estimate what you need as terms are fixed and it can be difficult to increase the loan value once it’s been secured.

2. The terms
Bridging loans are short term, usually paid back within 12 months so you need to be clear on your exit strategy from the outset. How do you plan to repay the loan over the next 12 months? Also, if you go over the agreed term, you could be charged and will need to re-negotiate new terms. Look for lenders which offer flexibility so that if you go over the average loan time you know exactly what your terms will be.

3. The specifics
Why is the loan required? You need to have a clear outline to present to your lender on what the money is going to be used for and why the funding is vital for your business now.

4. Trusted sources
If it’s your first time applying for a bridging loan, you may be unsure which lender to approach. It’s tempting to snap up the first offer you come across but always take the time to compare rates and check out the reputation of the firm that you are considering using. Use your existing trusted sources for recommendations, speak to either your lawyer or accountant for help.

5. Have your documents prepared
There are set documents you will need to provide for your bridging loan to be processed. Have your ID (either passport or driving licence), a declaration of income and copies of your building insurance ready.