The private equity sector provides funding for businesses. To bridge the gap between an investor agreeing to funding, and the business receiving funds, some businesses are turning to bridging finance to provide short-term funds. These type of bridging loans are known as funding finance.
A Reuters article from February 2018 notes that many lenders provide funding finance to fund these types of deals. They see them as low risk, high return loans. Some banks in the USA are reported to have provided loans worth up to $500m, usually for a period of one to three years.
Some lenders are competing for these loans by reducing their rates which decreases their profits. Though no lender has lost money in fund financing, financial experts have warned that these loans are not risk-free. Lenders who have loaned large amounts could be overexposing themselves.
Jennifer Choi, managing director of industry affairs at the Institute of Limited Partners Association is an expert advising caution. She said:
“If the use of these lines continues unchecked at current course and speed then it could pose real risk, and we don’t get the impression that the pace of growth has cooled off.”
A senior lawyer has said:
“Is it now being misused? The systemic risk is more real than many think.”
Most bridging loans are used for property deals, but increasingly businesses are using bridging finance to raise short term capital funds. Whilst most of these are less than £1m, loans worth considerably more are available to suitable business borrowers.