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Exploring finance options for businesses

Posted: July 25, 2017

If a business needs to raise funds, it can apply for an overdraft extension or a business loan from a mainstream lender, but there are also alternative lending products available.

A mezzanine loan is usually taken out when another mortgage is already in place on the property, and is used to raise capital and will be secured both by the property and an equity stake in the business. If the business cannot repay the debt, it could lose a share in the business. Mezzanines are therefore high-risk loans that should only be taken out if there is certainty that the capital raised will generate profits.

Stretch senior debt is a loan secured against property and other assets, as well as expected cash flow. The lender will require the cash flow portion of the loan to be repaid first, as this is less secure than other assets.

Mezzanine, stretch senior debt, and development finance are all loans that may require a portion of the business to be used as security, and because of this they usually carry considerable risk.

Bridging loans are increasingly being used by businesses and normally do not risk a stake in the business, as they are secured by the property. As well as being used for property purchases, a bridging loan can be useful in raising funds to purchase stock or equipment, or to enable a business to keep its head above water during a temporary downturn in cash flow. Bridging loans are quick to arrange and are flexible short-term options.