Small businesses are often surprised by unexpected expenses. Your equipment could break down and require you to purchase new machinery. Your company might also experience rapid growth. This is a great thing, but it may also mean you have to hire more people.
A bridge loan is a great option for businesses in these situations. These short-term loans are often used by businesses to cover immediate expenses.
What is a bridge loan?
A bridge loans fills in a temporary gap for your business. This concept is commonly used in the real estate industry. Imagine you want to buy a new house, but first you have to sell your old one. You can use a loan as a bridge to pay for the deposit of your new home. You can buy the property even before you sell your existing home. You can repay your bridge loan with the proceeds from the sale of your home.
We see that a loan is used to cover an immediate financial gap.
Business bridge loans are also based on the same principle. If you have exhausted all your other cash sources, a bridge loan can provide you with short-term capital. You could also use it for an urgent such as equipment breakdown.
Either way, you are bridging a financial shortfall. You can use the future earnings to pay back the loan.
What makes bridge loans different from traditional business loans?
Bridge loans are different from traditional business loans in a number of ways.
- Shorter application periods
- Rapid approval
- Shorter loan periods
- Interest rates on loans and mortgages are increasing
You may be able to take out a business loan from a bank of $20,000, for example. You may be able repay the loan over a period of several years. The repayment period for a bridge loan is usually one year or less.
Bridging loans can be as fast as a business loan. Faster approvals mean that you can get the money within days rather than waiting weeks or even months.
Bridge Loans: The Pros and Cons
You may want to consider a bridge loan for your business for several reasons. The speed with which you can access cash is one of the main benefits. There are other benefits to consider before making your choice.
Quick application and approval processes
Most bridge loan applications do not go through the same approval process as regular loans. The approval process is faster for bridge loans than other forms of financing. This type of lender offers flexibility to make sure you get the money in time for short-term requirements.
It can be an enormous benefit when it comes to property. The speed with which you can access financing can make or break a deal. This speed can be a great benefit in business. It may allow you to replace lost inventory or equipment quickly.
Available in Any Situation
It is not necessary to give a detailed explanation of why you require a bridge loan. Lenders are aware that you might need money for different reasons. Bridge loans are some of the most flexible commercial financial products because they understand this.
A bridge loan can be used for many different things.
- Paying wages to a new employee
- Buy inventory
- Land acquisition
- Replace or repair equipment
- Refurbishing Your Office
There are many ways to use social media for your business.
Interest is often built into the loan principal
A traditional loan is a borrowed principal plus interest. You may borrow $100,000, for example. You will repay the $100,000 loan plus interest.
A bridge loan also has interest. Many lenders will combine your total interest payment into the principal of your loan. Assume you pay $20,000 interest on a $100,000 loan. The bridge lender might state that your loan is $120,000 to simplify interest payments.
You Don’t Lose Ownership
Equity partners and investors are often sought by business owners in need of short-term funding. They can be a great source of expertise and capital, but there are also downsides to working with equity partners. Equity partners usually ask for a stake in your company in exchange for their investment.
If you do not want to give up any ownership, a bridge loan is a great alternative. You can still control your business and get the money you require.
How to solve cash flow problems
CB Insights reports that 38% new businesses fail due to poor cash flow. They either ran out of funds or failed to attract any new investment. These failures are devastating for businesses that had a good long-term outlook. Cash flow problems can bring an already profitable business to a halt.
Business in industries that have long payment cycles are a good illustration. An organization may have a lot of work. If it has to wait for months before it is paid for the work that it does, it can have short-term problems with cash flow. Bridge loans allow the company to continue growing and collect payments.
Cons of Bridge Loans
Bridge loans are not without their downsides. When applying for a bridge loan, borrowers should consider these factors.
Increased Monthly Payments
Bridge loans are typically short-term, which means they have higher monthly repayments. Most bridge loans are for a period of three to 18 month. The same amount could be offered by a traditional business loan, but repaid over a period of several years.
Companies that are already experiencing cash flow problems may find it difficult to make larger repayments. Missing a payment could also lead to penalties and interest.
High Interest Rates
Interest rates are also affected by the shorter loan terms for bridging lending. The rates of bridge loan providers are higher because they will collect less repayments. Some lenders charge origination fees and closing costs on their bridge loans.
You may pay less interest overall on a bridge than you would on a regular business loan. The length of the loan and the rates that lenders charge will determine the total interest.
Future Payments: Risks
Imagine that you have taken out a bridge loan to cover the long period of time your clients are required to pay. You assume that you will receive payment from your clients at a future date.
What if it doesn’t?
You may not receive the money you expected from your client because they have delayed or disputed payment or went out of business. In either case, you won’t get the money you expect to receive. This situation can cause cash flow problems, which may make it difficult to repay bridge loans.
What to look for in a bridge loan
When searching for a loan to bridge the gap, there are a few obvious things you should look for. Two of these are a favorable interest rate and a simple payment structure. The cost of the loan and its complexity are reduced by both. Check the reputation of your lender. You should check their track record for good customer relations. You can check online customer reviews to find out what previous customers think about the lender.
Look for the following features in a bridge credit:
- Funding Speed: Although most bridge lenders are quicker than traditional lenders, there are no bridge lenders who are all the same. Some lenders provide funds quicker than others. You should choose a lender who can provide you with the funds you need in a reasonable time frame.
- Prepayment incentives – Bridge loans are short-term products and meant to be temporary. Many lenders will offer incentives to repay the loan early. An amortizing bridge loan is one example where early repayment allows you to avoid interest. A factor rate loan will have a fixed amount of interest. Check if your lender offers discounts for early repayment of these loans.
Should You Consider a Loan Bridge?
Bridge loans are not intended to cover large business expenses. They are a quick-term solution for cash flow problems that could affect your business.
If you are facing such a problem, a bridge loan could be the right solution for you. The loan can be used to cover the lean months or fund growth while you wait for client payments. You can use these loans to replace vital equipment for your business.
A bridge loan is not the best option if you have severe financial problems. Even if the loan provides temporary relief, higher repayments may make this situation worse. Consider a traditional loan to help you with longer-term financing challenges.
FAQs about Bridge Loans
How much money can I borrow using a bridge loan
The maximum amount you can borrow varies according to the lender. Some lenders, like QuickBridge, provide bridge loans of up to $500,000.
How long are bridge loans valid?
The repayment period can vary from three months to three years.
Do business bridge loans need collateral?
Bridge loans usually require collateral such as a property or asset that your company owns.
