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Small to medium sized enterprises (SMEs) can face various financing issues, especially in the initial lifecycle of their business. Structured as a short-term loan agreement with flexible terms, bridging finance is a useful financial tool that can help carry SMEs through short-term periods of uncertainty.
“This form of short-term finance is a useful way for SMEs to bridge cashflow gaps, fund operational needs or to start expanding a business. Often, businesses also face the issue of delayed payment from their clients. The flexibility and fast access of bridging finance can support SMEs in terms of day-to-day operational cashflow in this instance,” says Tom Stuart, Chief Marketing Officer at Lulalend.
Having a clear understanding of bridging finance and its various forms is imperative in helping business owners understand which options are most suitable for their needs.
- Closed bridging finance
Closed bridging finance is a short-term loan that is issued by a lender to a borrower for a fixed term. This type of bridging finance tends to be more accessible because lenders have a higher level of certainty for the repayment of loan, since the set terms are agreed to beforehand.
- Open bridging finance
Open bridging finance adds an element of flexibility for lenders. The terms of the loan do not stipulate a fixed date for repayment, which can be useful for businesses who face uncertainty. However, a setback of bridging finance is usually a higher interest rate owing to the uncertainty around the repayment period of the loan.
- Debt bridging finance
Debt bridging finance is useful for businesses who need temporary, short-term finance to cover operational costs while a larger, long-term finance agreement may be pending. While this solution can be helpful for a smaller business that needs to cover costs in the short term, it is crucial to have a clear understanding of the repayment and interest structure of the loan to avoid exacerbating financial difficulties.
- Equity bridging finance
Equity bridging finance usually takes the form of venture capital or private equity investment for equity in exchange for funds. In this instance, a venture capital investor would supply funding for a lender while the lender raises equity financing. This is a useful way for a lender to avoid accumulating high-interest debt.
“These various bridging finance options available to SMEs can help address their unique challenges. By taking a careful, strategic approach to bridging finance and its unique benefits, SMEs have a financial lifeline to help keep their operations functional during periods where cashflow might be dried up”, concluded Stuart.