The small business finance industry can be complicated. There are lots of different product options, and it’s sometimes difficult to know which is the right one to go for in your business.
This article will explain the different types of bridging finance, and exactly what you need to know for each, as well as what is required to apply, and how much it might cost. By the end of it, you’ll be in a position to make a decision on the best bridging finance solution for your business and apply if you would like to.
What is Bridging Finance
Bridging finance is a short-term loan or facility that free’s up capital for a business. It is like a cash advance on money that you are due to receive.
Generally, bridging finance is used in a situation where cash is trapped in some sort of transaction like a property sale, or when a corporate buyer has long payment terms.
Bridging finance ‘bridges’ the gap and allows the business to keep operating smoothly without a cash shortfall. Because of the fact that bridging finance is generally backed by some sort of asset, these types of loans are always short-term. The usual timeframe is between 1 to 5 months.
Bridging finance loans are a great way for small businesses to effectively free up cash flow, and they are relatively inexpensive and easy to access.
How Does Bridging Finance Work?
The bridging finance process is relatively simple. Here’s how it works…
Types of Bridging Finance
Purchase orders are a great example of bridging finance.
When you win a contract for a purchase order, you will likely need some sort of finance to deliver on the goods required. Government and corporate purchase orders can extend into the millions.
Purchase order bridging finance comes in handy here and let’s you deliver on the goods required and have the money to operate your business.
Contract finance is much the same as purchase order funding. The only difference is that you are delivering on a contract and the contract requires materials and resources prior to payment.
Bridging finance for contracts fills the gap.
Property Bridging Finance
Property bridging finance unlocks the cash that you are due to be paid for the sale of a property (or another asset, too!).
Once your property is sold, there is a delay in processing between the Deed’s office, the bank, and the seller. Bridging finance allows you to access a portion of the sale price of your property immediately, and use that cash for whatever you would like to.
In some instances, you will invoice a large buyer for goods or services renders. Even if their payment terms are 30, 60, or 90 days, you are still required to pay VAT to SARS in the interim.
This can create a cash shortfall and is a great use case for bridging finance on large invoices.
Pro’s and Con’s
Benefits of Bridging Finance
- Quick access to cash
- Relatively inexpensive compared to other unsecured loans
- Access funds for growth
- Don’t give up equity
- Short term
Negatives of Bridging Finance
- Can eat into profit margins
Costs of Bridging Finance
As with almost all types of small business finance, the costs associated with bridging finance are dependent on your exact situation.
Costs generally depend on:
- Your business’s turnover,
- Your business’s free cash flow,
- Your business’s assets,
- Your business’s length of trading,
- The business operators and directors
- The type of bridging required (property, payment etc.), among others.
In general, the less certain the lender is that your business will be able to repay on time, the more expensive the finance is going to be.
To give you some ballpark estimates on costing, bridging finance can range from 1.5% of the financed amount per month through to 5% of the financed amount per month.
How to Apply for Bridging Finance
FundingHub makes the application process super easy. One application with us gets you quotes and comparisons from over 40 different lenders in South Africa.
We will understand your specific funding requirement, and then match you with the appropriate products.
The application process is simple:
- Fill out a 5-minute application here. Give us as much detail and documentation as you can so we can do our best to help.
- We will understand your needs and get in contact with you to clarify if needs be.
- We will survey our network of over 40 different lenders and find the best partner who wants to finance your business.
- We give you your options, and you go with the financer chosen. You won’t have to apply again, we’ll just send all your documentation and information through to them.
How does the Application Process for Bridging Finance Work?
Step 1: You identify trapped funds that you would like to free up.
Step 2: You can apply through FundingHub and explain your funding preferences.
Step 3: The funder will do there due diligence on you and your business. If the bridging finance is for a purchase order or contract, they will look at the suppliers and buyers involved too.
Step 4: The funder will pay you a percentage of the value of the trapped capital. This usually extends up to a maximum of 85%. You will get charged interest on that amount which you have accessed.
Step 5: At the end of the period (i.e. when you get paid the cash due), you repay the funder, including any outstanding interest.
The payment terms for bridging finance are generally flexible. If it for the sale of an asset, the finance is generally payable in a lump sum. Most lenders will work with you to find a suitable payment arrangement that suits both parties.
Criteria for Bridging Finance
As for all funding applications on FundingHub, the two hard criteria are:
- 6 Months Trading History, and
- R350k minimum annual turnover.
For the different types of bridging finance, there may be other criteria, for example…
- Purchase orders require a reputable PO requester. No lender is going to finance a PO from someone who is unlikely to pay the invoice.
- Property bridging finance requires that the property is unbonded, and the likelihood of the lender being able to sell it again is high (it is liquid).
Documents Required for Bridging Finance
The standard document list for most types of bridging finance includes:
- Business Registration Document
- Directors’ ID Documents
- Bank Statements (6 months - 12 months)
- Annual Financial Statements (Last Year)
- Management Accounts (Last Year) - If Available
Beyond these documentation requirements, there may be cases where more is required. For example, purchase order finance also requires:
- The original Purchase Order document
- A supplier quotation
The best way to make sure you get the best rates, and finance offer is to make sure you have all your documentation ready. The Small Business Finance Guide explains more to help get you ready.
Bank Bridging Finance vs Alternative Lenders
In South Africa, there are some banks that offer bridging finance to businesses. However, this is almost always to medium to large-sized businesses that are well established and have some sort of security or collateral.
The other thing to consider when deciding whether or not to go with a bank is speed of access. Banks are notoriously slow and can take weeks, if not months, to process applications.
Alternative lenders have the following benefits:
- Great customer service: Alternative lenders understand that small business owners are time-strapped and require great service. They also use it as a point of differentiation when comparing themselves with banks.
- Technology-enabled: This means an easier application process and sometimes cheaper finance.
- Fast: A slick application process means you can get funds in your account in as little as 24 hours.
Are alternative lenders trustworthy?
The big “but” that’s on everyone’s lips. The short answer is: Absolutely.
The small business finance space has come on leaps and bounds in South Africa since its beginning. The number of small business lenders that are available is a testament to that.
Additionally, organizations like SASFA (of which FundingHub is a member) are promoting responsible lending and ensuring that the industry maintains its reputation in the eyes of small business owners.
Bridging Finance Examples
Sale of a Property
You are the owner of a property in Durban, and you have decided to sell it in order to free up some cash. You are the registered owner of the property.
You have offered the property for sale at R3 000 000. You are waiting for the Deed’s office to process the transaction, but you anticipate a delay of at least 30 days.
As soon as the property is sold, you will receive R2 000 000 in cash. You want to use that cash to build a new property in Johannesburg. You have already secured a leasing contract for the Johannesburg property for R500 000 per year.
You are looking for a bridging finance solution that will give you R2 000 000 in cash, and will take 3 months to be paid out.
You go to FundingHub and request a bridging finance loan, and compare your offers from multiple lenders (😉).
After your quick application, FundingHub finds you a lender that will lend you R1 500 000 at a rate of 7% p.a. This will be repaid in 3 months.
You accept the offer and are informed that the lender will pay you R1 500 000 within 24 hours.
After you receive the cash, you purchase the Johannesburg property with the funds. You are now able to payout the R500 000 per year in leasing payments.
You are a company that manufactures and exports agricultural products. You have been awarded a government contract to deliver 5 000 bags of potatoes to the town of Uitenhage in the Eastern Cape.
You are awarded the contract and the government pays your suppliers and you the agreed price. You place an order for 5 000 bags of potatoes at a price of R500 per bag. You deliver the goods and get paid. You deposit the money in your bank account.
Soon after, you receive an invoice from your supplier for R500 000.
The invoice is for the potatoes you ordered and delivered.
You need the money to pay the supplier, but you also need the money to continue paying your other suppliers, employees, and to pay your own operating costs.
If you did not have bridging finance, you would not be able to pay the supplier until the government paid you. This could take 90 days.
The amount of money that you need is the same as the invoice from your supplier.
- You apply for bridging finance from FundingHub.
- The funder agrees to lend you the money for the potatoes that you have already delivered.
- The funder places a lien on the invoice for the amount that you have borrowed.
- The funder pays you R500 000.
- You pay the supplier.
- The funder takes its share of the invoice and the rest is sent to the government.
To repay the funder, you can either:
- Repay the funder in a lump sum at the end of the period if it is for the sale of an asset.
- Financially repay the funder in installments if it is for a contract.
Contract fulfillment is a great example of bridging finance.
Let’s say your business wins a contract for R1 million. You have to deliver the goods required by the contract within 30 days.
You can apply for bridging finance to bridge the gap until the contract is fulfilled. As soon as you have completed the contract, you can pay us back!
A purchase order is an everyday occurrence in business. Whether you are buying goods or services, there is usually a payment delay.
Let’s say you win a contract for R500 000 to build a school. Once the contract is signed, you are due to be paid within 30 days.
You can apply for bridging finance here to bridge the gap until the payment is received.
Frequently Asked Questions
What is Bridging Finance and how does it work?
Bridging finance is a short term loan or facility that is used as a cash advance on money that is due to be paid.
What is Bridging Finance used for?
Bridging finance is used in a range of situations, including:
- The sale of a property or another asset,
- Contract finance,
- VAT, and
- Purchase orders.
How do I get Bridging Finance?
To get started, please fill out the application form here. Provide us with as much detail about your situation so we can match you with the right lender.
Does FundingHub offer Bridging Finance?
Absolutely. We work with over 40 different lenders and can help you get tailored quotes and offers to suit your needs.
Are bridging loans dangerous?
No. Not at all. Bridging finance is fast and easy. As long as you have all your documentation ready, and can pay back the loan on time, there is no reason why you shouldn’t apply.
Bridging finance is a low-risk, short-term loan. As long as you can pay it back on time, there is very little risk associated with it.
What are the costs of bridging finance?
The costs associated with bridging finance are going to be determined by your business’s exact situation.
Generally, the less certain the lender is that your business will be able to repay on time, the more expensive the finance is going to be.
In general, the costs associated with bridging finance can range from 1.5% of the financed amount per month through to 5% of the financed amount per month.
Example Cost Structure:
Let’s say you need to access R1 million of your R5 million house that has just been sold. You apply for bridging finance for 3 months until your transfer goes through.
You get charged 1.5% interest per month.
R1 000 000 x 1.5% = R15 000 per month
R15 000 x 3 = R45 000 total cost of finance.
When your house sale goes through, you repay the lender R1 045 000 plus any processing fee’s that the lender might charge you, which should not be more than +- R1 000.
How much can I apply for?
The amount that you can apply for depends on your business needs and cash flow. If you have a small business with a turnover of R10 000 per month, you can apply for up to R100 000.
How much interest do you pay on bridging finance?
Generally, the interest rates on bridging finance are going to be higher than your standard unsecured loan. Rates can be anywhere from 1.5% to 5% per month.
The interest rate will depend on:
- Your business’s turnover,
- Your business’s free cash flow,
- Your business’s assets,
- Your business’s length of trading,
- The business operators and directors,
- The type of bridging finance required, among others.
When should I use a bridging finance facility?
Bridging finance is most commonly used to get cash trapped in a property at the time of sale. Other common uses for small business finance include:
- Disbursing funds trapped in a contract
- Getting cash trapped in a purchase order
- Paying VAT
- Any time you need cash quickly and don’t want to give up equity to get it.
How long is a bridging finance loan usually?
Bridging finance loans are generally between 1 and 6 months.
Can you settle early?
Yes. Look out for the t’s and c’s in your contract with the lender to check if any fee’s apply, though!
What amounts can you get bridging finance for?
Bridging finance loan amounts range from R10k to R100million+.