Bridging finance can be used by businesses to recover from periods where temporary changes to market conditions severely reduce profitability. A British mining company offers a good illustration of how this works.
Wolf Minerals, a Plymouth-based mining company, suffered financial hardship from low prices for the tungsten it produced and increases in operating costs, reported ProactiveInvestors.co.uk in August 2017. The price of tungsten then rose, and the company found ways to become more efficient in its mining operations. This created optimism that the company could turn around its finances, but it needed capital to invest in these new operating procedures. Around £50m was raised from shareholders and a £5m bridging loan.
This money enabled Wolf Minerals to improve the way ore was processed. This included installing new refining equipment, which made it cheaper to mine tungsten. These operating cost savings, combined with a 44% increase in the price of tungsten since December 2016, means that the company is now becoming more profitable.
After repaying a bridging loan, companies sometimes need more funding to enable the business to continue to grow, but this case illustrates how bridging finance can be used to help turn a business around.
A bridging loan requires a clear exit strategy for when and how the loan will be repaid. In the case of Wolf Minerals, they had a clear plan on how investing in equipment would make their mining activities more efficient and more profitable. The extra income generated enables the repayment of the loan.