Navigating the small business finance industry can be complex. With a myriad of product options available, choosing the right one for your business can often seem overwhelming.
This guide will demystify the various forms of bridging finance, providing you with the essential information for each option, including application requirements and potential costs. By the conclusion, you’ll be equipped to select the most suitable bridging finance solution for your business and proceed with an application if desired.
What is Bridging Finance?
Bridging finance refers to a short-term financing option that provides businesses with immediate capital. It acts as an advance on funds that are expected to be received in the near future.
Typically, bridging finance is utilized in scenarios where cash is tied up in a transaction, such as a property sale, or in cases where a corporate buyer imposes lengthy payment terms.
Serving as a financial ‘bridge’, this type of financing ensures that businesses can continue their operations without facing liquidity issues. Since bridging finance is usually secured by an asset, these loans are inherently short-term, generally spanning from 1 to 5 months.
For small businesses looking to enhance their cash flow, bridging finance offers an affordable and accessible solution.
How Does Bridging Finance Work?
Bridging finance offers a straightforward solution to temporary financial needs. Here’s a breakdown of how it functions:
Exploring Different Types of Bridging Finance
Purchase Order Financing
A prime example of bridging finance in action is through purchase orders. Winning a large purchase order contract often means needing upfront capital to fulfill the order, especially when dealing with government or corporate contracts that may be worth millions. Purchase order financing provides the necessary funds to meet these obligations while maintaining business operations.
Contract Financing
Similar to purchase order financing, contract financing assists businesses in managing contracts that require substantial materials and resources before payment is received. It effectively bridges the financial gap until the contract is fulfilled and payment is secured.
Property Bridging Finance
This type of financing is beneficial when awaiting funds from the sale of a property or another significant asset. Due to the processing time involved between the Deed’s office, banks, and the seller, there can be a considerable delay in receiving the sale proceeds. Property bridging finance offers immediate access to a portion of these funds, providing liquidity to meet other needs.
VAT Bridging Finance
For businesses that issue large invoices with extended payment terms of 30, 60, or 90 days, the requirement to pay VAT to the South African Revenue Service (SARS) in the interim can lead to a cash flow shortfall. Bridging finance for VAT purposes helps manage these situations, ensuring that businesses can cover their VAT obligations without disrupting their cash flow.
Advantages and Disadvantages of Bridging Finance
Advantages of Bridging Finance
- Swift access to funds
- Cost-effective compared to other types of unsecured financing
- Enables financial growth without diluting ownership
- Offers a short-term financial solution
Disadvantages of Bridging Finance
- May reduce profit margins
Bridging Finance Costs
The expenses linked to bridging finance for small businesses vary based on specific circumstances.
Factors influencing costs include:
- The company’s revenue
- Available cash flow within the business
- Company assets
- Duration of business operation
- Business management and leadership team
- The specific bridging finance needed (e.g., for property, payments, etc.)
Generally, the riskier the proposition for the lender (in terms of the business’s ability to repay promptly), the higher the cost of borrowing will be.
For a rough idea of expenses, the rates for bridging finance typically range from 1.5% to 5% of the total amount financed per month.
Eligibility Criteria for Bridging Finance
For all loan requests submitted through , applicants must meet two primary requirements:
- A minimum of 6 months of operational history.
- At least R350,000 in annual revenue.
Additional criteria apply for specific bridging finance options, such as:
- For purchase order financing, the entity issuing the purchase order must be credible and financially reliable, as financiers will not fund orders from parties deemed unable to fulfill payment obligations.
- Property bridging loans necessitate that the property in question is not currently mortgaged and that there is a high likelihood of the property being readily sellable (i.e., it is marketable).
Documentation Needed for Bridging Finance
The basic documentation required for various bridging finance applications typically includes:
- Company Registration Certificate
- Identification documents for the directors
- Bank Statements for the past 6 to 12 months
- Last year’s Annual Financial Statements
- Last year’s Management Accounts, if available
Certain circumstances might necessitate additional documents. For instance, financing against purchase orders also requires:
- The original Purchase Order
- A quotation from the supplier
To ensure you receive the most favorable financing terms and offers, it’s crucial to have all necessary documentation organized and accessible. The Small Business Finance Guide offers further insights to help prepare your application effectively.
Comparing Bank Bridging Finance and Alternative Lending Options in South Africa
In the context of South Africa, several banks provide bridging finance options targeted predominantly at medium to large enterprises that possess tangible assets or collateral.
One critical aspect to weigh when considering banking options is the pace at which funds can be accessed. The banking sector is often criticized for its lengthy processing times, which can extend from weeks to months for loan applications.
On the other hand, alternative lending presents several advantages:
- Exceptional Customer Support: Recognizing the time constraints faced by small business owners, alternative lenders prioritize outstanding customer service, setting themselves apart from traditional banks.
- Technological Advancements: The use of technology streamlines the application process, making it not only easier but in some cases more cost-effective.
- Rapid Funding: Thanks to efficient application procedures, it’s possible to secure financing in as little as 24 hours.
The Reliability of Alternative Lenders
The prevailing question is their trustworthiness. The concise response is a resounding yes.
The evolution of the small business financing landscape in South Africa is indicative of significant progress. The burgeoning number of available small business lending options bears witness to this growth.
Examples of Bridging Finance
Selling a Property
Imagine you own a property in Durban and decide to sell it to unlock some funds. You are the official owner of this property.
You’ve put the property on the market for R3,000,000 and are currently waiting for the Deeds office to finalize the sale, which you expect might take upwards of 30 days.
Upon the sale of the property, you’ll receive R2,000,000 in cash. Your plan is to use these funds to construct a new property in Johannesburg. For this new property, you’ve already secured a lease agreement that will bring in R500,000 annually.
In the meantime, you’re in need of a bridging finance solution that can provide you with R2,000,000 immediately, with a repayment period of 3 months.
You proceed to apply for financing, seeking a bridging loan, and you evaluate offers from various financial institutions.
Shortly after your application, a finance agency matches you with a lender willing to provide R1,500,000 at an interest rate of 7% per annum, repayable over 3 months.
You agree to this proposal, and the lender commits to transferring the R1,500,000 to you within the next 24 hours.
With the received funds, you go ahead and purchase the property in Johannesburg, enabling you to cover the R500,000 annual lease payments.
Product Delivery
As a company specializing in the production and export of agricultural goods, you’ve successfully secured a government contract to supply 5,000 bags of potatoes to Uitenhage, located in the Eastern Cape. Following the award of this contract, the government has fulfilled the payment for your suppliers and your company at the negotiated rate. Subsequently, you procured 5,000 bags of potatoes at R500 each, completed the delivery, and deposited the received funds into your bank account. Shortly after, an invoice amounting to R500,000 was issued by your supplier for the potatoes supplied.
This payment is crucial not only for settling your supplier’s bill but also for maintaining the financial flow needed to cover other supplier payments, staff wages, and operational costs. Without access to bridging finance, awaiting payment from the government, which might extend up to 90 days, would hinder your ability to clear the supplier’s invoice immediately.
The exact amount needed coincides with the supplier’s invoice value. In response, you sought bridging finance from a financial institution, which consented to lend the required amount against the already delivered potatoes. They secured the loan by placing a lien on the invoice and disbursed R500,000 to you. This enabled you to clear your supplier’s invoice, after which the financial institution claimed its portion from the invoice, forwarding the remainder to the government.
To settle the debt with the financier, options include a one-time repayment post an asset sale or structured repayments over time for contracts.
Contract Fulfillment as an Example of Bridging Finance
Imagine your business clinches a R1 million contract requiring delivery within 30 days. Bridging finance can be instrumental in covering the interim until contract fulfillment, allowing for prompt repayment upon completion.
Understanding Purchase Orders
Purchase orders are a routine aspect of business transactions, encompassing both goods and services, typically involving payment delays. For instance, securing a R500,000 contract to construct a school entails payment within 30 days post-contract. Bridging finance serves as a solution here, bridging the financial gap until the receipt of payment.
