Understanding the benefits of bridging finance

Bridging finance can be used by business owners for a range of purposes. Particularly when they need a quick cash flow injection. It’s a form of business finance that works as a cash advance and helps to bridge that gap in your cash flow. With bridging finance you can cover costs immediately while waiting for an expected cash boost.

Bridging finance is any type of short-term financing arrangement intended to cover a business’s cash flow gaps until it can arrange for longer-term financing. This type of financing is generally needed to fund a business’s operational needs and is usually in the form of working capital. It can be particularly handy when expanding your company or premises or when there is a project that requires you to have immediate cash flow but only pays out later.

5 ways that bridging finance can help your business

  • Fast access to finance to boost cash flow
  • Provides a buffer in between receiving payments from customers
  • Gives options of flexible repayment options
  • Can prevent financial loss for seasonal business needing to purchase stock mid-season to make profit
  • Allows you to buy out a difficult partner.

Types of bridging finance that are useful for business owners to know

  • Closed bridging finance: Is available for a fixed period of time (generally a few months) agreed on by the lender and borrower. It tends to be more accessible as the lender has a higher level of certainty when it comes to repayment of the loan.
  • Open bridging finance: Has no fixed date for repayment. This can be a desirable option for businesses who don’t know when they will be accessing the funds needed to pay off the loan. The interest rates tend to be higher because of the higher level of uncertainty around the repayment.
  • Debt bridging finance: Is when a business takes out temporary finance to cover short-term costs while awaiting finance. The loan serves as a bridge as it connects the borrowing company to debt capital. For this type of debt, it’s important to understand what interest you’ll be paying so you don’t exacerbate any existing financial difficulties.
  • Equity bridging finance: This is when businesses seek capital from venture capitalists to avoid high interest debts. For example, a venture capitalist firm might provide a business with capital in the form of a bridging finance round to tide them over while they raise equity financing. The borrowing business might then offer the lending firm equity ownership in exchange for funds.

Common uses of bridging finance

  • Helpful for quick access to cash for a down payment
  • Purchasing new equipment that is priced above the amount of cash on hand available to a business
  • Covering essential operational costs (such as salaries) during temporary dips in cash flow
  • If you’re a seasonal business, it can help sustain cash flow during low season.

Apply for bridging finance with Lulalend.

Useful resources:
As South Africa's first online provider of business finance, we provide short-term, unsecured business funding of up to R2 million to SMEs who have been in operation for at least one year and are making a monthly turnover of R40 000.
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