Things to Know about Bridge Loans for Businesses
Bridge loans are a type of short-term financing, which typically features a term of a couple of weeks to one year. Also known as a swing loan or gap financing, a bridge loan allows small businesses to make strategic purchases, such as acquiring a property or buying equipment. This type of business financing is often used by entrepreneurs to boost their capital value, while in some cases, it is also opted to “bridge” the gaps in their business financing solutions.
A business owner can also choose a bridge loan to meet an unexpected need for cash to maintain smooth business operations. As there is no stigma involved in applying for a bridge loan, businesses can always go for this financing option when there comes a circumstance that requires some additional funding. This way, the business owner can be always prepared to effectively deal with all the financial requirements as they come. For instance, if there is a need to buy new equipment, a property, or manage the accounts payable and working capital, businesses can simply explore bridge loans as an alternative to borrowing from their cash resources to accomplish all their wants. Apparently, this short-term loan would benefit the business in the long term.
Choosing a Bridge Loan
Most small business owners would prefer contacting their friends and family to seek a short-term loan, or take some cash out of their personal resources to grab that quick opportunity. These options are very simple to manage and can be considered the easiest means to get some additional funding. However, you can also approach a lending institution that offers a bridge loan to meet your needs of business financing. This is, in fact, a more practical way of securing the funds, which allows you to follow a flexible structure to repay the loan.
When you are choosing a lender for a bridge loan, you should try to find one that has a well-established history in the field. The financing company should be able to satisfy your request in the most applicable manner, following industry-specific protocols and regulations. Besides, make sure that the terms and conditions are transparent and the adjudication process is simple. The approval process should also be streamlined and easy to understand.
Note that there can be a diligence period to approve a bridge loan in some cases, which can last up to more than a couple of weeks. Yet sometimes, your business opportunity might not wait for that long. That is why it is better to look for a lending institution, which can approve the funding quickly in one or two steps. However, the speed of granting the bridge loan should always come second to the reliability of the financing source.
Costs Associated with Bridge Loans
A bridge loan can seem to be a bit costly when compared to the other types of business financing options such as working capital or real estate financing. The interest rates can be anywhere between 15% and 25%, while there is also an added upfront fee of 2% charged by most of the lending parties. Then there can be extra fees and charges for arrangement, payout, and retirement of the loan. Therefore, it is always better to ask about all such backend charges before signing up for the bridge loan. However, the cost of financing over a few weeks or months can often seem much beneficial when you consider the long-term gains of meeting your immediate financial needs.
You should also be prepared to pledge collateral for securing the funds. Generally, lending establishments ask for a lien on any of your unencumbered business assets, while it can sometimes be backed up with a second lien on the business’ working capital or other tangible resources. You may be required to sign an agreement to work with the lending institution honesty and repay the loan as per the terms and conditions stated in the agreement too. Sometimes, a personal guarantee can also be pledged as collateral based on the amount needed as a bridge loan.
Repayment of Bridge Loans
As bridge loans are short-term, you need to identify and set up the means to repay the loan amount in due time even before applying for the funding. You can also provide details of the source of revenue that would be used to repay the loan to the lender to assert your credibility, which would facilitate the bridge loan approval process. Note that the lending party would be very favorable to a business that qualifies for an SBA loan or business line of credit. That is because such business loans are usually approved based on profit improvements.
The term of the bridge loan also has a bearing on its interest rates; the shorter the term, the lower the rates would be. However, it is very important to set a reasonable term based on your capabilities to repay the amount and not go for an unrealistic term just to reduce the charges. Sometimes, the financing company can grant an extension for repayments, but that would depend upon your relationship with the lender as well as your financial history.