How Business Bridge Loans Can Help Get You Back on Solid Financial Footing
How Business Bridge Loans Can Help With Finances
Are you in a short-term financial pinch? Learn about how business bridge loans work and eight ways they can help get your back on solid financial footing.
Let's be honest: your business needs money. Especially if you don't want to be the one out of every four small businesses that fail due to financial issues.
The good news for you is that you can close the gap between the money you need and the money you have using business bridge loans.
What are they, and how can they help you? Keep reading to find out.
What Are Business Bridge Loans?
To put it simply, a bridge loan is a form of loan used to help cover expenses until a business or individual can secure more permanent financing or deal with their existing obligation.
It does this by providing an immediate cash flow once the loan is granted, allowing you to meet your current obligations. As the name suggests, it's a financial bridge to help you keep your finances above water.
That said, they're short-term loans, typically for a period no longer than a year, and are usually backed by some form of collateral like real estate. The interest rates also tend to be high.
How a Bridge Loan Works
Individuals tend to use bridge loans in order to pay off the mortgage on a previous home. Businesses, on the other hand, tend to use business bridge loans while they're securing long-term financing and need to cover expenses in the meantime.
Typically, bridge loans are secured either from your bank or a third-party lender. This is usually a short-term, remedial solution to financial issues.
Say, for example, a company has already secured a bank loan, but that loan is broken into tranches and the first won't come for another six months. In this case, a business may choose to get a bridge loan to cover expenses until the first tranche kicks in.
Keep in mind that these are limited remedial solutions--if a business isn't careful, they can run into more financial issues due to the high-interest rate attached to bridge loans.
Bridge Loan vs. Traditional Loan
This begs the question: how is a bridge loan different from a traditional loan.
As you might guess from our earlier example, bridge loans are generally faster. That is, they tend to have a quicker application, approval, and funding process than a typical loan. This is what makes them so convenient.
However, the higher-than-normal interest rate on a bridge loan is the cost a company has to pay for convenience. This is fine for businesses who take them because they plan to pay them off quickly.
Bridging Loans and Bridging Finance
Business bridge loans are one part of what's called bridge financing.
The goal of bridge financing, like bridge loans, is to bridge the gap between when a company's financial reserves run dry and when they expect to receive new funds. This isn't used for every expense under the sun, but rather to fulfill short-term working capital needs.
Securing a Bridge Loan
Your business can secure a bridge loan through one of three avenues:
- A factor
- Equity investors
The most common example is when a firm goes to a bank. In this example, the firm should have enough monthly sales and a solid enough cash-flow position that the bank is comfortable authorizing a loan for 60, 90, or 120 days.
A factor is a firm that provides 50-70% of the face value of specific accounts receivable (with a steep fee.) In this case, the balance is paid to the entrepreneur at the collection date on the receivables.
Then, there are equity investors, who will sometimes agree to go through with a bridge loan in advance of the closing stock purchase.
Things to Keep in Mind
Before you decide that business bridge loans are exactly what your company needs in order to reach your next round of financing and start really wowing your investors, we have a few words of caution for you.
First, before you decide to apply, you have to consider the whole picture of your business's financial situation. Remember that bridge financing is only intended as a temporary supplement, not a long-term solution. If your business needs more money over a long period, bridge financing may not be the answer.
It essentially boils down to two things: the relative rarity of bridge loans, and the inherent riskiness.
Bridge Loans Are Rare
This is especially true among homebuyers, though businesses also treat with caution when it comes to bridge financing in general and bridge loans in particular.
For homebuyers, this is because financial planners often don't recommend bridge loans.
For business owners, this is because lenders are aware of the risk involved in such a loan and because your investors may not be keen on using bridge financing to solve your problems.
They Can Be Risky
No matter how much your business needs the money at the moment, you can't get around the ugly reality of high interest.
Bridge loans can be more difficult to secure these days because lenders are aware of the risk attached to this type of loan and so are careful about approving them.
The choice of a bridge loan can also raise some red flags for potential investors--some of them may be wondering why you couldn't acquire external capital, and whether they're paying the right price to invest in your company.
It all comes back to the interest, which can quickly get out of hand if it turns out that the funding you thought would come through later doesn't actually materialize. Suddenly, you're saddled with even less money than you originally thought and more debts to pay back.
Making Sense of Business Bridge Loans
If now that you know all the essential information about bridge loans, you still think that bridge loans are right for your company, we're here to help.
We offer four quick steps to unlocking equity so that your business can stay on track.