Can You Use a Bridging Loan to Buy a Business?

Do you need to raise cash quickly for a company acquisition?

Find out how bridging loans can provide the rapid funding you need to close deals and buy businesses.

While bridging loans are often associated with property transactions, they’re increasingly being used as a flexible financing option for those looking to purchase a business.

If you’re wondering whether you can get a bridging loan to buy a business, the answer is yes – and this guide will explore how.

What is a Bridging Loan?

A bridging loan is a short-term financing solution designed to cover a gap in funding.

These loans typically last from a few months up to two years and can range from £50,000 to several million pounds.

Unlike traditional business loans, bridging loans are secured against assets, usually property, and are known for their quick approval and funding process.

Can You Use a Bridging Loan to Buy a Business?

The short answer is yes, you can use a bridging loan to buy a business.

This option has become increasingly popular among entrepreneurs and investors who need to move quickly on business opportunities.

Bridging loans can be particularly useful when a business purchase needs to be completed rapidly, or when traditional financing options are not immediately available.

How Bridging Loans Work for Business Acquisitions

Bridging lenders need property to secure your debt against. So one or more properties will be needed, with sufficient equity.

If you have an existing commercial property, or a property portfolio, then these should be acceptable. In some cases, additional security, such as personal property, may also be required.

Lenders are very flexible on the property type, but all will need to be valued to assess their security value to the lender.

Once the loan is approved, funds can often be released within a matter of days or weeks, allowing for a swift completion of the business purchase.

Repayment of the short-term loan is made in a lump sum at the end of the term, often through refinancing with a long-term business loan or through the sale of other assets.

Interest is rolled up and paid at the end of the term, which can help with cash flow during the initial stages of business ownership.

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Advantages of Using a Bridging Loan

One of the primary advantages of using a fast bridging loan for a business acquisition is the speed of funding. In competitive business sales, being able to move quickly can be the difference between securing the deal and losing out to another buyer.

Bridging loans also offer flexibility in their use.

While the primary purpose may be to purchase the business, the funds can often be used for additional purposes such as initial working capital or immediate improvements to the business.

As long as your security and exit strategy is strong, the lender won’t be too bothered about the merits of the actual business. They lend against assets, what you do with the money is secondary.

Another benefit is the ability to secure a business opportunity even if you don’t have all your long-term financing in place. This can be particularly useful if you’re waiting for funds from other sources or if you plan to quickly improve the business and refinance based on its increased value.

Read more: What can a bridging loan be used for?

Potential Drawbacks

While bridging loans are immensely useful for business acquisitions, they’re not without risks.

The higher interest rates mean that they can become expensive if not repaid quickly. The short-term nature of these loans also puts pressure on the borrower to have a solid exit strategy in place.

There’s also the risk that if the exit strategy fails – for example, if you’re unable to refinance or sell the business as planned – you could face difficulty repaying the loan.

This could potentially lead to the loss of any assets used as security.

The overall costs of a bridging loan, including arrangement fees, valuation fees, and legal costs, can be significant. Make sure these are properly factored in to your calculations.

Alternatives

While bridging loans can be a fast and effective solution for business purchases, they’re not the only option.

Traditional business loans, while often slower to arrange, can offer lower interest rates for those who qualify. These loans have longer terms, which can ease cash flow pressures in the early stages of business ownership.

They may be more suitable if you have a strong credit history and can demonstrate the business’s ability to make regular repayments.

Seller financing is another alternative, where the current owner of the business agrees to accept payment over time.

This can be an attractive option as it often comes with more flexible terms and aligns the seller’s interests with the ongoing success of the business. It’s particularly useful when the seller is confident in the business’s future performance and is willing to stake some of their return on it.

For larger acquisitions, private equity might be a consideration.

While this involves giving up some ownership of the business, it can provide substantial capital without the pressure of loan repayments. Private equity investors can also bring valuable expertise and connections to help grow the business.

Is a Bridging Loan Right for You?

Deciding whether a bridging loan is the right choice for your business deal depends on several factors.

Consider the urgency of the purchase – if you need to move quickly to secure the deal, a bridging loan is probably the right choice. These lenders are used to moving quickly on decisions, with funds released in 7-10 days.

Also, think about your exit strategy. If you’re confident you can refinance or repay the loan within a short time-frame, no-nonsense bridging finance could work well.

However, if you have time to arrange traditional financing or if you’re unsure about your ability to repay or refinance quickly, other options might be more suitable. It’s always wise to consult with a specialist broker who can provide personalised advice based on your specific circumstances.

How to Apply for a Bridging Loan to Buy a Business

The application process starts with an initial enquiry to a finance broker. You’ll need to provide details about the business you’re looking to purchase, the amount you need to borrow, and your proposed exit strategy.

Required documentation usually includes business financial statements, projections, details of the security being offered, and a comprehensive business plan. Personal financial information may also be required, especially if you’re offering additional security.

Working with a specialist broker can be particularly beneficial when seeking a bridging loan for a business purchase. They can help you understand the complexities of the bridging loan market, access exclusive deals, and ensure your application is presented in the best possible light to lenders.

Bridging loans are a valid funding option for business acquisitions, offering speed and flexibility that traditional financing options lack.

However, they come with higher costs and risks that need to be carefully considered.

By understanding how these loans work, their advantages and drawbacks, and the alternatives available, you can make an informed decision about whether a bridging loan is the right choice for your business purchase.

Need some help?

If you need a short-term bridging loan then a specialist broker is a good place to start. You will get expert help and advice along with a wide range of lenders to choose from.

To get matched with a specialist broker, please call us on 0330 030 5050.

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