Bridge loans can be a useful financial tool for businesses experiencing a cash flow shortage, but how does a bridge loan work? Let’s take a closer look at this type of business loan and where you can get one for your business.
What Is A Bridge Loan?
Bridge loans are short-term loans business owners can use to get through a cash-flow shortage. These loans are designed to help “bridge” the gap between when a business needs to spend money and when more money is coming in. Your business may be waiting for a long-term financing approval or payment on outstanding invoices. While you are waiting for that money to come in, a bridge loan can help you meet financial obligations and keep your business moving forward while giving you flexibility.
For example, say you are a business owner that needs to repair essential equipment to keep your business running. However, you don’t have the cash to pay for the repairs until next month. Instead of waiting to do the repairs, you can get a bridge loan. Approval for bridge loans usually takes a few hours (and sometimes even a few minutes), unlike traditional loans that can take weeks and even months to process. Once the money is in your account, you can get the repairs done and pay back the loan with the revenue you generate with working equipment.
Bridge loans can be a handy tool for business owners who have immediate expenses but who may not have immediate access to cash.
How Does A Bridge Loan Works?
Business owners can apply for a bridge loan just as they would any other type of loan, but the approval process will be much faster. So, how does a bridge loan work? Some bridge loans can get money in an account within a few days. Once the bridge loan is approved, the money can go towards business expenses such as payroll, new commercial property, equipment upgrades, or financing a deal. The business will then be responsible for paying back the loan based on the terms set by the bridge loan lenders.
Most bridge loans are:
- Approved very quickly, sometimes as soon as a few minutes
- Short-term, paid back in less than five years and sometimes as soon as a few weeks
- At a higher interest rate than traditional loans
- Backed by collateral such as real estate
Depending on the bridge loan terms, you may also have to make payments on the loan more often. For example, while traditional loans require monthly payments, some bridge loans may require bi-monthly, weekly, or even daily repayments.
Bridge loans may also be called bridge financing, gap financing, interim loans, or swing loans.
When to Use a Bridge Loan
You can use bridge loans as a financial tool to help your business through times of cash shortages. This might include:
- When you are waiting for approval on long-term financing options
- While waiting for the payment of large outstanding invoices
- During times of cash shortages while waiting for liquidation of other assets
Because they are short-term loans with higher interest rates, you should be sure you have other revenue or financing coming into the business to pay off the bridge loan. Therefore, bridge loans should be a stop-gap method to help get you through a cash flow shortage and not rely on long-term financing.
The Cost Of Bridge Loans
The cost of the bridge loan will depend on the lender you use, the amount of the loan, and the terms you agree on. Therefore, you’ll want to carefully review not only the repayment costs but the overall cost of the loan as well as any fees the lender may charge you. This will give you a clearer picture of the total cost of the bridge loan and how it will impact your business now and in the long run.
Average Bridge Loan Fees
Because of the unique nature of a bridge loan, lenders may charge some additional fees. These will vary depending on the lender as well as the type of bridge loan that you use. However, they might include:
- A percentage of your sales during the term of the loan
- Prepayment penalties for early repayment
- Daily repayment fees
Read the fine print of your loan agreement so you are aware of any fees the lender may charge for the bridge loan.
Average Bridge Loan Rates
Bridge loans will have high-interest rates due partly to their shorter terms and quick approval process. Businesses can expect to pay between 8% and 11% for their bridge loan, although some will have rates as low as 5% and as high as 20%.
Your interest rate will depend on your credit rating, how long your business has been operating, and how much money you need to borrow. If you have excellent credit and a long history as a business, you are more likely to get a lower rate on your bridge loan.
How to Get a Bridge Loan
Suppose you determine that a bridge loan is the right decision for your business, contact lenders for more bridge loan information. You can get a bridge loan from many financial institutions. Most bank loans and private lenders’ loans include commercial bridge loans to small and medium businesses. You’ll want to start researching your options to find the best terms possible.
Many businesses will find favorable terms with alternative lenders like First Down Funding. This privately-owned lender specializes in short-term financing options for small businesses, including bridge loans. Businesses can be preapproved for a loan in minutes, and the money can be in your account within 72 hours. Alternative lenders such as First Down Funding can be a better stop-gap financing option for new businesses that may not have a lot of business history. They may also be suitable for owners who don’t have the excellent credit that larger banks and financial institutions require.
To get a bridge loan, make sure you:
- Know how much you need to borrow. Don’t borrow too much, or you may have trouble making the repayment. Make sure you get a loan amount that’s large to see you through your cash flow shortage, though. Think about all the expenses you’ll need to cover until additional revenue starts to come into the business.
- An idea of the terms you want. While this may require negotiation between you and the lender, you should have some idea of how long you want the loan to go. Do you need it for a few weeks? Or would you rather have smaller repayments over the next couple of years? Think about your ideal interest rate, too, while taking your business’ financial history into account.
- Business financial information. Most bridge loan applications are fast, but lenders will still need basic information about your business. This will include how long it’s been in operation, your revenue and expenses, and how you plan on repaying the loan.
- Have collateral. Not all loans will require collateral, but many bridge loans will. This might be equipment, property, or another asset that will help secure the loan.
After reviewing this article you may have a better idea of how to answer the question “how does a bridge loan work?”. The process for securing a bridge loan will be a lot like applying for a traditional business loan, except much faster. Some lenders approve loans in minutes and have the money in your account within a few days. Bridge loans can make the difference between having to close your doors and help your business thrive.