Bridging loan to finance a cash deficit

The objective of a bridging loan is to finance a cash deficit with a short or medium-term bank loan, thereby allowing an investment in movable or immovable assets to be made while awaiting a major inflow of capital enabling the bridging loan to be subsequently repaid.

Technically, it is a standard short-term cash credit but, unlike cash credit, its use is clearly defined and limited to a specific transaction. The bank will only release the funds if it is in possession of supporting documents (proof of purchase on the one hand and of expected sale on the other hand).

Objective: it is used to finance the acquisition of land, buildings, production tools, machinery, vehicles and intangible assets (such as business assets, patents, licences, etc.).

Who is concerned

Available to the self-employed and any type of business, a bridging loan applies to those that do not have sufficient resources of their own to finance an investment, but will have some capital in the future.

Example:

Example 1:
A business wishing to purchase or build a new building with the proceeds from the sale of its old site, but that does not yet have the proceeds of said sale, can apply for a bridging loan.

Example 2:
A property developer can apply for a bridging loan to finance the acquisition of a building site. This bridging loan will be repaid as the properties built on the site are sold.

Prerequisites

Documentation or description of the business

  • copy of the company’s articles of association;
  • group structure if the company is part of a more complex group;
  • last 3 audited balance sheets of the borrower and, if applicable, the latest available trial balance;
  • order book (where applicable);
  • forecast balance sheet or business plan in the case of a new business activity or a major expansion plan.

Presentation of the project

  • detailed description (including figures) of the planned investment;
  • financing plan;
  • calculation of feasibility and return and calculation of the breakeven point;
  • appendices:
    • land: preliminary sale agreement, cadastral map, building permit;
    • building: preliminary sale agreement, construction plan, building permit, specifications, quotes, photos (if any), lease, etc.;
    • machinery: list of investments, replacement of existing equipment, additional equipment, purchase orders or invoices;
    • company: preliminary sale agreement, due diligence, audited accounts, etc.;

Guarantees

The guarantee required by all banks before granting a loan is the solvency of the borrower and the profitability of the project to be financed. In addition, the bank will inform the beneficiary of the bridging loan of the tangible, personal or moral guarantees deemed necessary to guarantee the loan granted.

The most common guarantees requested for a bridging loan are:

  • an existing mortgage registration, where applicable, on a building currently owned by the business but set to be sold in the near future;
  • a new mortgage registration on the building to be purchased;
  • a mortgage mandate on the building put up for sale;
  • a commitment from the seller to transfer the proceeds from the sale to the lending bank;
  • a mortgage mandate on the building to be purchased and intended for resale;
  • a pledge on business assets;
  • assignment of rental income;
  • assignment of a fire insurance policy (for a building);
  • surety of the parent company or partners/shareholders;
  • various moral guarantees.

When the partners/shareholders of a business have to stand surety for the company, the bank should be provided with the details of their financial situation.

How to proceed

Duration and amount

Duration

  • short to medium-term;
  • generally less than 2 years.

Amount

As a general rule, financing of 70 % to 80 % of the value to be financed.

Interest rate

  • interest rate depending on the quality of the client, the project and the guarantees offered;
    • variable rate;
    • rate generally lower than for cash credit, but higher than for a mortgage loan.

Repayment

Repayment depends on different criteria, including, for example, the amount, the rate, the amortisation period of the asset to be financed, etc.;

  • partial amortisation (monthly interest payments and repayment of the principal amount at maturity);
  • full amortisation (principal amount and interest paid at maturity of the loan).

Set-up times

The reviewing and processing times depend on the complexity, size and urgency of the case.

Advantages, disadvantages and risks

Advantages

  • allows a company to finance investment projects in spite of a cash deficit;
  • allows a business to wait for the ideal time to resell an asset without having to make monthly loan repayments;
  • facilitates sustained growth for the business which should generate significant recurring profits in the future, allowing it to repay the loan in a lump sum at maturity;
  • interest rate generally lower than for traditional cash credit;
  • possibility of withdrawing funds in full in the case of a purchase or gradually, for example in the case of a construction;
  • debit interest is tax deductible, allowing the taxable amount to be reduced and therefore less tax to be paid.

Disadvantages

  • guarantees may need to be provided to the bank;
  • credit is only released on the basis of supporting documents;
  • risk of a decrease in the value of the asset for sale;
  • no protection against the risk of rising interest rates.

Risks

Inability to repay if the triggering event expected to generate the proceeds to repay the loan in a lump sum does not materialise or if the profitability of the project is not guaranteed.

Example

Purpose

Building

Machinery

Expected life

20 years

7 years

Investment amount

2,000,000

500,000

Amount of investment loan

2,000,000

500,000

Duration of loan

30 months

6 months

Indicative fixed interest rate

5,50 %

5,50 %

Annual interest

110,000

13,750

Balloon payment

2,000,000

500,000

 

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