When you spot the perfect business to buy, timing and being able to take action can make all the difference.
Many business buyers find themselves stuck between spotting a great deal and getting the money together to make it happen.
That’s where bridging loans come in. These short-term loans help buyers move quickly on business opportunities, filling the gap until longer-term funding is secured. While they’re well-known in property circles, bridging loans are becoming increasingly popular for business purchases too.
Let’s look at how these loans work, who they suit best, and what you need to know before applying.
What is a Business Acquisition Bridging Loan?
A business acquisition bridging loan is a short-term secured loan designed to help you raise money to buy a business quickly.
Think of it as a temporary funding solution that covers the gap between finding a business to buy and arranging permanent finance.
These loans work differently from standard business loans and lenders are flexible on what you want the money for.
The main focus isn’t on your business plan or trading history – instead, lenders look at the assets you’re offering as security and your plan for repaying the loan (known as your exit strategy).
This makes them particularly useful when you need to move fast or when traditional lenders might take too long.
You can borrow anything from £50,000 to several million pounds, depending on the security you offer.
Most loans run for 3-12 months, though some lenders offer terms up to 24 months. The key is having a clear plan for repaying the loan, whether that’s through selling another asset, arranging a long-term loan, or using business profits.
How These Loans Work
The process starts with securing your loan against an asset – usually property, but sometimes other business assets too.
You’ll need to show the lender two main things: that your security is worth enough to cover the loan, and that you have a solid plan for repaying it.
Let’s say you’re buying a small manufacturing business for £500,000.
You might secure a commercial bridging loan against your current business premises that is worth £750,000. The lender will assess the property’s value and your exit strategy – perhaps you’re planning to refinance with a commercial mortgage once the purchase is complete.
One business owner recently used a bridging loan to buy a competitor when they unexpectedly came up for sale. They secured the loan against their existing premises and repaid it three months later when their bank approved a long-term business loan.
Without the bridging loan, they would have missed the opportunity.
Lenders normally offer up to 75% of a property’s value, less any existing secured debt. If you need more than this then it’s possible to bring in another property by using a cross charge, boosting your borrowing power.
Common Uses in Business Acquisition
Business purchases come in many shapes and sizes.
You might be buying a competitor to expand your market share, or perhaps you’ve found a business that complements your existing one. Some buyers use bridging loans to buy businesses at auction, where you need to pay quickly or lose your deposit.
Others use them to buy stock or equipment along with the business.
For example, a restaurant owner might use a bridging loan to buy another restaurant including all its fixtures and fittings, planning to refinance once they’ve shown the business is trading well under new ownership.
Who Might Need This Type of Finance?
Bridging loans suit several types of business buyers.
If you’re an existing business owner looking to expand through acquisition, these loans can help you act fast when opportunities arise. First-time business buyers might use them when they’ve found the right business but their mortgage application is taking time to process.
Property investors often use bridging loans when buying commercial premises with sitting tenants. The speed of bridging finance helps them secure good deals, especially when properties come up at auction.
The common thread? These buyers all need quick access to funds and have a clear plan for repaying the loan.
Key Requirements for Applicants
Before you apply, you’ll need to prepare several things.
First, suitable security – usually property with enough equity to cover the loan amount plus interest. It’s OK if there’s already a mortgage in place. Bridging lenders will lend against a second charge.
Your exit strategy is key. Lenders want to see a realistic plan for repaying the loan. This might be selling another property, arranging a commercial mortgage, or using confirmed funding from another source.
Working with a Broker
A good commercial mortgage broker can make a big difference to your bridging loan application.
They know which lenders suit different situations and can often access better rates through their relationships. They’ll help structure your application to give it the best chance of success.
Brokers also help you understand the full costs involved and can spot potential problems before they arise. Their experience with different lenders means they can often get decisions more quickly than if you approach lenders directly.
Alternative Finance Options
While bridging loans can be excellent for quick business purchases, they’re probably not your only option.
- Traditional business loans might work if you have time to wait.
- Asset finance could help if you’re mainly buying equipment.
- Invoice finance might help fund working capital needs in your new business.
If you already own a commercial property then it should be possible to arrange a commercial loan to raise the capital needed. This will be at a competitive rate, but is likely to take many weeks to get approved.
Consider whether you really need the speed of a bridging loan or if a slower but cheaper option might work better. Remember, bridging loans tend to have higher interest rates than long-term finance.
Choosing the right finance for your business purchase means weighing up several factors.
Consider:
- How quickly you need the funds
- What security you can offer
- Your chances of getting long-term finance
- The total cost of the loan
- Your confidence in your exit strategy
If you’re considering a commercial bridging loan for a business purchase, start by gathering information about your security property and developing your exit strategy. These are the two things lenders focus on most.
Speaking with a broker can help you understand your options and find the most suitable lenders for your situation. They’ll guide you through the process and help you avoid common pitfalls.
Remember, while bridging loans can be an excellent solution for business acquisition, they need careful planning. Get professional advice to ensure they’re the right choice for your situation.