As any small business owner knows, it isn’t easy to turn your venture into a success. One in twelve businesses is forced to close each year, with a third of small business owners citing a lack of capital as their top challenge. For a quick and easy short-term financing solution, many business owners turn to bridge loans for help during tough times.
What is a Business Bridge Loan?
A bridge loan is a type of funding that many small businesses use to satisfy an immediate need for cash. They’re typically quicker and easier to secure than traditional long-term loans, but also tend to be more expensive.
In general, businesses don’t use bridge loans to cover long-term expenses. Instead, this type of financing “bridges” the gap between an immediate need for cash and a more permanent solution. For example, a business may expect to pay off a bridge loan with future revenue or may refinance with a long-term loan instead.
How Business Bridge Loans Work?
Unlike traditional loans, bridge loans tend to have a short repayment period. Many offer terms ranging from just a couple of months to five years. This often means that lenders expect more frequent payments, sometimes as often as daily or weekly.
A Brief Overview of Bridge Loans
- Brief-term financing acting as a "bridge" to span the interim funding gap
- Fast, convenient funding within the lending process, particularly vital where the closing time matters
- Flexible credit requirements unlike traditional business financing
- More streamlined and amenable process than conventional loans, simplifying the lending journey with less paperwork
- A versatile cash flow solution
- Short repayment period
- Flexible payment options, usually daily, weekly bi-weekly or monthly loan repayments
The Most Common Uses for Bridge Loans: Bridge Financing Options
Bridge loans are versatile enough to be used across a wide variety of industries, from service to manufacturing. They can be used to address just about any short-term cash flow problem that may affect the future success of a business. Here, we go over some of the most common cases where bridge financing can come in use.
1. Buying Real Estate
Buying commercial real estate can be a challenge, especially when different parties are competing for a prime spot. Businesses need to act quickly if they’re going to land a desirable real estate deal. However, in the face of considerable costs, many firms struggle to purchase inventory upfront. Not only that but it can be difficult for small businesses to find approval with traditional bank lenders. Here's where real estate bridge lenders step in.
Fortunately, business bridge loan lenders provide quick, short-term funding options, like bridge loans. These allow businesses to get their hands on cash in as little as a single day. With this immediate access to funds, a business can secure that attractive property--anticipating it to boost its future revenue, paying for itself. Often, after using these funds from the business bridge loan lenders to secure the real estate deal and purchase inventory, a business will refinance the bridge loan into more economical long-term financing through borrowing business or other means.
2. Fixing Up a Property
Sometimes, a business isn’t able to secure a long-term mortgage because a commercial property doesn’t meet the strict requirements of potential lenders. However, if the business is grappling with the strict criteria set by banks and the accuracy of those commercial conditions, a bridge loan might offer the possibility of a workaround.
Renovations can often be expensive when ensuring a building is up to code. But with potential discounts attainable through a bridge loan, businesses can improve the equity of their properties. Small businesses can therefore take out a bridge loan if they need to fix up a property before applying for long-term financing.
Once the renovations enhance the property's value and reduce potential liabilities, we recommend refinancing the bridge loan with a traditional, long-term mortgage. This helps in solidifying the business's financial standing.
3. Keeping Businesses Afloat
Many small businesses need a large investor or acquirer to survive in today’s corporate atmosphere. However, the path to attracting the attention of a financier inside the competitive business financing industry can be a long, often spanning months or even years.
To circumvent cash flow issues while they hunt down an investor, small business owners often resort to working capital financing. By opting for a short-term financing program, small businesses can borrow funds to cover critical operational costs such as rent, utilities, and wages. Eventually, this borrowed amount gets reimbursed once the investor funds kick in.
Some expanding businesses, considering the acquisition of property, have even taken advantage of borrowing a bridge loan to secure a greater amount of funding. Similarly, no-doc business loans, an alternate borrowing option, continue to gain popularity in the quest for securing funds.
4. Starting a Business
Bridge loans are ideal for those who are starting a new business and don’t have a significant source of revenue yet. Whether you're a startup entrepreneur or a seasoned business owner on the brink of a new venture, these loans can provide crucial assistance.
- They can help to cover quintessential startup expenses such as payroll, taxes, and inventory, enabling you to establish your footing and build a customer base. Once the business begins generating income, the owner can expediently nip the bridge loan in the bud.
- Bridge loans can be a lifeline for new ventures, and particularly those dipping their toes into the manufacturing domain.
- Companies typically don’t get the remuneration until after they’ve shipped a product, leading to a potential shortage of funds for initial costs.
- A bridge loan can bridge this gap, covering expenses such as materials and labor. Upon delivery of the goods, and subsequent inflow of money, it can be repaid, ensuring smooth operation in the face of any cash flow hiccups.
Why Use Business Bridge Loans?
Your small business can benefit from taking out a bridge loan to solve short-term cash flow problems.
- In general, it's much easier to gain approval for a bridge loan than long-term financing.
- Most alternative lenders have far more lenient qualifications for businesses looking to take out a loan.
- Compensation for these services comes from the wider range of repayment costs inherent with bridge loans.
- The applications are streamlined and available for completion online in the comfort of your home.
- Often, you can get same-day approval for bridge loans. With some financing options, you can have extra cash in hand immediately. In contrast, it can take days or even weeks to process a traditional long-term loan or mortgage.
The Different Types of Bridge Loans
When it comes to bridge loans, there’s no “one-size-fits-all” solution. Rather, there are a variety of financing options to cater to the various needs of different business owners. Here, we go over the four main types of bridge loans that small business owners use to keep the cash flowing.
1. Short-Term Loans
Short-term loans are essentially identical to long-term financing options but tend to deal with smaller amounts of cash and offer shorter repayment periods. Mattering to most businesses, these loans offer repayment schedules of no longer than eighteen months.
Short-term loans are also a popular choice in the banking industry for their ease in securing as compared to their long-term counterparts. Typically, small businesses can gain approval for a short-term loan in just one day. Regardless, the interest rates tend to be significantly higher than long-term rates, as a result of collateral requirements and matters relating to seasonality. Most short-term loans come with interest rates of at least 10% or higher.
- Businesses don’t have to commit to long term financing
- Minimal paperwork to deal with, no matter the loan amount
- he approval process is quick,, same day funding
- Higher interest rates than other types of loans
- May require daily or weekly repayment installations, due to the collateral requirements.
2. Business Line of Credit
A business line of credit works much like a company credit card. You have a set amount of cash that’s at your disposal, determined by factors such as your creditworthiness and financing needs, but you have to pay it back with interest. You also can’t to have a credit limit that you cannot exceed. In general, limits are much higher than those on credit cards and based on the businesses revenue.
Unlike other types of loans, a business line of credit only requires that you pay interest on the funds that you take out. However, most lenders require that you take out a draw and pay a fee for each draw verses other options. Interest rates also tend to be 9% or more.
- A flexible choice for multiple business types based on creditworthiness
- Helps businesses build good credit
- Pay no interest on unused funds
- Businesses may have to offer collateral as insurance
- Interest rates, origination fees, and other fees can be pricey
- Smaller credit limits verses traditional business loans
3. Accounts Receivable Financing
For businesses that don’t get paid until the end of a job, such as construction, service, and more, accounts receivable financing options allow them to use future revenue for current cash flow problems. Accounts receivable financing can also serve as a prolific solution for manufacturing businesses struggling with cash flow. Unlike a repayment plan involving month-to-month payments, this type of bridge loan lets you offer an unpaid invoice to secure immediate cash flow from a lender.
Here, there's an anticipation of paying off the owed amount in a lump sum once the invoice has been fully paid by your client. Often, it engages a weekly fee until meeting the full cost of the loan, earning it a reputation as a costlier solution despite boasting low-interest rates. Another significant aspect to consider lies in the underwriting process.
Accounts receivable financing can pose certain risks, primarily because it heavily depends upon a future payment assumption from your client or customer in full. Moreover, if a client exhibits poor credit health, it may negate your chances of loan approval, thus emphasizing the pivotal role of underwriting.
- Immediate or near-immediate funding
- Easy application and approval process
- Doesn’t require collateral other than the receivables
- Approval depends on client credit
- High-risk option due to dependency on the lump sum payment
- May be recurring weekly fees
4. Merchant Cash Advance
A merchant cash advance is perhaps the most straightforward type of short-term bridge financing. An alternative lender simply provides a predetermined amount of money upfront—called an advance—which can be used to cover day-to-day operations or potentially finance a business working capital needs. You're able to spend this as per your business needs.
However, in addition to repaying the cash with a flat cost, you also have to repay the funder with a small percentage of your future sales. This can turn a merchant cash advance into a significantly more expensive option than other types of bridge loans, particularly for businesses that churn out a healthy profit during busy periods. Comprehensive documentation is not typically required, making the process relatively smoother.
- Few qualification requirements to meet
- Flexibility in use of funds
- No personal guarantee
- Flexible repayment process, not term limit
- May prove costly due to factor cost or other fees
- Requirement of daily or weekly
- Requires business performance guarantee
What to Look for in a Bridge Loan
As a small business owner, it can be difficult to decide which type of bridge loan is right for you. With so many alternative lenders to choose from for bridge loan, it can be easy to find yourself feeling overwhelmed. It’s crucial to know what key features you should consider in any bridge loan, regardless of the type.
- Many business owners’ first thought when exploring short-term loans is the interest rate. These loans commonly have higher rates than long-term loans since lenders must assess risk when lending out cash.
- Search for a bridge loan that offers a manageable interest rate for your wallet. Dedicate time to calculate exactly how much extra you’ll be in debt to, beyond the initial advance, throughout the payment period. If this excess surpasses what you expect to earn through the loan or advance, it may be wise to explore elsewhere.
- Delve into any miscellaneous charges a lender may impose, such as a fraction of your sales or specific penalties. Many entrepreneurs end up clearing their short-term loans ahead of schedule, so it's logical to look for bridge loans that overlook prepayment penalties.
- Consider the duration it might take you to replenish the funds to settle a short-term loan. If regular repayments are unworkable for you, you might want to find something with a lengthier repayment period.
- Shorter-term bridge loans often demand more frequent payments. Some contracts even bind the borrower to make daily payments.
How to Refinance a Bridge Loan
Not all business owners plan to pay a bridge loan off in the given period. Often, they plan to switch over to a long-term financing option instead—seeking to clear obstacles to revenue production and consequently decrease business liabilities, as bridge loans are often intended for. Long-term loans tend to have more favorable terms, such as lower interest rates and fewer fees.
While a bridge loan provides quick cash—necessary for small business owners given the long processing time and strict qualification criteria of traditional loans—the true merit lies in using these funds to fix your cash flow situation. Indeed, decreasing liabilities via a bridge loan can increase your business's valuation, justifying the switch to a longer term loan once cash flow improves.
To refinance your bridge loan, you can turn to a lender such as a bank for a solution with more favorable long-term payment terms. Keeping in mind that a second charge loan lender will only start recouping payment after all existing liabilities have been paid.
If you can’t gain approval with major lenders, there’s no need to worry. You can always consider a small business loan, or SBA loan, as an alternative option. This type of financing is backed by the government, making it a low-risk option for lenders and a practical option for business owners aiming to manage their liabilities.
SBA loans are often larger than bridge loans, sometimes reaching up to $5 million. They also have much longer repayment terms, often ranging up to 25 years. Plus, given their low-risk nature, lenders are able to charge lower interest rates than they might otherwise.
Final Thoughts: Business Bridge Loans
Bridge loans can be an invaluable tool for small business owners, helping to address cash flow emergencies before they snowball into bigger issues. In the realms of bridge lending, securing a bridge loan is fast, easy, and offers a temporary relief for almost any financial hiccups. While they might be slightly costlier than conventional financing methods, the initial investment required for these bridge lending solutions can help a small enterprise ensure its successful future.