# Is it risky to use bridging finance for my business?
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2022-03-28
Category: FINANCE
Category URL: https://financedigest.com/category/finance
Meta Title: Understanding Bridging Finance: Risks & Rewards
Meta Description: Learn all about bridging finance, a short-term funding option for projects, and the risks involved. Find out how it works and when to consider it.
URL: https://financedigest.com/is-it-risky-to-use-bridging-finance-for-my-businesshtml

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Bridging finance can be a way of financing projects under a tight deadline or to purchase something with the intention of selling upon exit. This type of funding is usually secured and is only used for short term purposes, so it is important to understand the risks to you and your business.

**What is bridging finance?**

A bridging [loan is a type](https://www.financedigest.com/types-of-business-loans.html "Types of business loans") of financing which can help you pay for something new while waiting for funds to become available from selling something else. The idea is that it ‘bridges the [gap’ and allows you to fund](https://www.financedigest.com/closing-the-funding-gap-how-alternative-lenders-the-secret-to-sme-survival-in-europe.html "Closing the funding gap: How alternative lenders the secret to SME survival in Europe") projects in the interim.

Depending on the type of loan, this could be regulated if it is against someone’s primary residence, but some activity is not regulated, [based on the mortgage credit directive](https://www.handbook.fca.org.uk/handbook/PERG/4/10A.html).

Many individuals or [businesses choose this option for real estate if they want to buy a new property](https://www.financedigest.com/the-importance-of-property-care-looking-after-your-business.html "The Importance of Property Care: Looking After Your Business") or do work on a property whilst waiting for the sale of their existing property to go through. They are a type of [secure loan via which a high value asset](https://www.financedigest.com/rambus-unveils-vaultify-trade-for-secure-transaction-and-storage-of-crypto-assets-on-blockchain.html "Rambus Unveils Vaultify Trade for Secure Transaction and Storage of Crypto Assets on Blockchain"), such as property or land, needs to be put down as collateral.

**How does bridging** [finance work?](https://www.financedigest.com/despite-return-to-work-virtual-meetings-will-continue-to-disrupt-business-as-usual-in-finance.html "Despite Return to Work, Virtual Meetings Will Continue to Disrupt Business as Usual in Finance")

There are two different types of [bridging loans:](https://www.financedigest.com/common-uses-for-bridging-loans-and-what-youll-need-to-get-one.html "Common Uses for Bridging Loans and What You’ll Need to Get One") ‘open’ and ‘closed’ and the key difference is the repayment date.

With open bridging loans, there is no [fixed repayment date but it is usually understood that the loan will be paid back within one year](https://www.financedigest.com/new-foresight-smart-bonds-fund-attractive-fixed-returns-and-a-choice-of-one-two-or-three-year-terms.html "New Foresight Smart Bonds Fund – Attractive Fixed Returns and A Choice Of One, Two Or Three Year Terms"). Closed bridging loans, on the other hand, have a fixed repayment date. You will usually receive a closed [bridging loan if you have already exchanged contracts but are still waiting for your property](https://www.financedigest.com/bridging-finance-for-property-development.html "Bridging Finance for Property Development") sale to complete.

Bridging [loans allow you to borrow anything between £50,000 and £50 million but the exact amount will depend on how much available equity](https://www.financedigest.com/home-equity-made-simple-things-to-know-before-applying-for-loans.html "Home Equity Made Simple – Things to Know Before Applying for Loans") you have. Generally speaking, the maximum loan, including interest, will be limited to 75% loan to value. Loans will be secured on the property itself or across multiple properties in [order to raise](https://www.financedigest.com/italys-leonardo-raises-fy-orders-guidance-after-strong-nine-months.html "Italy’s Leonardo raises FY orders guidance after strong nine months") the necessary funds.

You will repay the [bridging loan either by selling the property](https://www.financedigest.com/using-bridging-finance-to-purchase-an-un-mortgageable-property.html "Using Bridging Finance to Purchase an Un-mortgageable Property") (or properties) or by raising finance via a traditional mortgage. (Source: [Octagon Capital](https://octagoncapital.co.uk/))

**What are the risks of bridging loans?**

Bridging [loans are known to be a very expensive way](https://www.financedigest.com/4-ways-to-get-a-bad-credit-loan.html "4 Ways to Get a Bad Credit Loan") of borrowing funds as they are designed to be for large amounts of money over a short-term period.

Generally speaking, interest rates for bridge [loans tend to be quite high meaning that they could be quite an expensive way of raising finance](https://www.financedigest.com/1-in-3-uk-businesses-looking-for-finance-are-finding-it-harder-to-get-a-loan.html "1 in 3 UK businesses looking for finance are finding it harder to get a loan") in the long run. In addition to the [interest rates](https://www.financedigest.com/interest-rate-and-recession-fears-knock-stocks-and-oil.html "Interest rate and recession fears knock stocks and oil"), bridging loans can incur multiple different fees meaning that the whole process can add up. (Source: [Proper Finance](https://www.properfinance.co.uk/bridging-loans/))

With bridging loans, you are relying on longer-term financing. This means that if you go down this route without having a clear or realistic exit strategy in place, it can be very high risk. For example, if you are waiting to sell a property, the [worst thing](https://www.financedigest.com/how-much-council-tax-train-tickets-and-rent-voted-worst-value-for-money-things-in-the-uk.html "How much!? Council tax, train tickets and rent voted worst value for money things in the UK") you could do is not have a buyer lined up. There are many different parts of the chain that could fall through; if for any reason that happens, you could be left with a very expensive loan that you will [need to pay](https://www.financedigest.com/why-you-need-to-pay-attention-to-conversion-rate-optimisation.html "Why You Need to Pay Attention To Conversion Rate Optimisation") off over a long-term period. Bridging loans mean that you will pay for any delays or setbacks.

**What are the advantages of using a bridging loan?**

Bridging loans are a [way of accessing large funds](https://www.financedigest.com/6-ways-to-fund-university.html "6 Ways to Fund University") relatively quickly and easily. This means that they offer a great deal of flexibility, whatever your [financial needs](https://www.financedigest.com/cfos-need-a-focus-on-forex-in-financial-planning-tools-accountagility-reveals.html "CFOs need a focus on forex in financial planning tools, Accountagility reveals") and regardless of the project type. They also tend to have fewer entry barriers than many traditional loans making them more accessible for many. As a result, you may be able to [secure lending on properties](https://www.financedigest.com/prime-property-finance-online-marketplace-capitalrise-secures-seed-funding-from-financial-services-legend.html "Prime property finance online marketplace, CapitalRise, secures seed funding from financial services legend") where high street lenders cannot.

Unlike other loan types, repayment for bridging loans also tends to be more flexible [meaning that borrowers can typically have open](https://www.financedigest.com/open-banking-what-it-means-for-you-and-the-industry.html "Open banking: What it means for you and the industry") discussions with bridging lenders about the duration of the loans, especially if the process is dependent on multiple factors.

One of the other advantages of bridging [loans is that there are limitless potential applications](https://www.financedigest.com/new-figures-show-31-increase-in-loan-applications-as-economists-look-for-growth-in-consumer-confidence.html "New figures show 31% increase in loan applications, as economists look for growth in consumer confidence"). Because bridging loans can be used for any purpose, you will not [need to be extremely specific when approaching](https://www.financedigest.com/why-a-modern-organisation-needs-an-agile-approach-to-software-asset-management.html "Why a modern organisation needs an agile approach to software asset management") lenders, unlike with some banks and more traditional lenders.

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