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Is a Commercial Bridge Loan Right for You?
Unexpected expenses can often sneak up on small businesses. A commercial bridge loan helps bridge the gap in unexpected expenses and keep your business afloat during uncertain times. Let’s say, for example, a crucial piece of equipment breaks down and you need a replacement immediately. Or, you have the opportunity to move to a larger office space to meet increasing demand – but you need funds for the deposit.
In these types of circumstances, a bridge loan can give your business access to the cash it needs. Businesses often use these short-term loans to pay for immediate expenses.
What Is a Bridge Loan?
The idea behind a bridge loan is that it fills a short-term gap for your company. The concept is most commonly seen in real estate. For example, imagine you’re buying a new home, but you need to sell your existing home before you can do so. In this case, you can use a bridge loan to cover the cost of the deposit on your new home. This allows you to buy the property before you’ve sold your current home. Once you’ve sold your old home, you can use the proceeds to repay the bridge loan.
So, we see a loan used to cover a short-term financial gap.
The same concept applies to business bridge loans. A bridge loan may provide short-term working capital if you’ve exhausted all other sources of cash. Alternatively, you could use it to cover the costs of an emergency, such as equipment breaking down.
In either case, you’re bridging a short-term financial gap. The loan you take out gives your business the money it needs, and you can then use future proceeds to make repayments on the loan.
How Bridge Loans Differ from Traditional Business Loans
Bridge loans differ from regular business loans in several ways:
- Shorter application periods
- Rapid approval
- Shorter loan periods
- Higher interest rates
For instance, you may have the option of taking out a traditional bank business loan of $20,000. With that loan, you may be able to repay the amount over several years. With a bridge loan, the repayment period is often one year or less.
The upside is that business bridge loans are as close to instantaneous as business loans get. Expedited approval processes mean you gain access to the money in a matter of days, rather than weeks or months.
How To Use A Commercial Bridge Loan
Business owners use commercial bridge loans for many reasons to support their business goals. Most often, businesses use a commercial bridge loan for four main instances: business expansion, real estate investments, working capital needs, or accounts receivable delays.
A commercial bridge loan provides funds to support business expansion needs – whether that’s fulfilling large inventory orders, hiring more staff, or upgrading equipment. It also can provide funds to purchase real estate investments to expand your business space. A commercial bridge loan is also commonly used for any working capital needs or bridging the gap in accounts receivable delays so you can continue to make payroll or pay vendors. Ultimately, a commercial bridge loan can be customized to suit your needs and help you reach your goals.
The Pros of Bridge Loans
There are several reasons why you may consider a business bridge loan. Many of the benefits relate to the speed of access to cash. However, there are some other advantages to consider when making your decision.
Fast Application and Approval Processes
Bridge loan applications usually don’t go through the same rigorous approval processes as normal loans. As a result, approval is much faster than most other types of finance. Lenders in this space offer agility to ensure you receive the sum borrowed in time for your short-term needs.
This can be a huge benefit in property, where the speed of accessing financing can clinch a deal. In business, this speed may help you to quickly replace equipment or lost inventory without delay.
Available for Any Situation
You don’t typically have to present a detailed case for why you need a bridge loan. Lenders understand that you may need the money for a variety of purposes. This understanding makes bridge loans some of the most versatile commercial financial products.
You can use a bridge loan for many things:
- Paying the wages of a new hire
- Buying inventory
- Acquiring land
- Replacing or repairing equipment
- Refurbishing your office
The list is practically endless as long as the use pertains to your business.
Interest Is Often Built into the Loan Principal
With a traditional loan, you borrow a principal, and the lender adds interest to it. For example, you may borrow $100,000. But you’ll repay $100,000 plus the interest attached to the loan.
You also pay interest on a bridge loan. However, many lenders combine the total interest payable into your loan principal. Let’s assume you’d pay $20,000 in interest on our $100,000 loan. A bridge lender may state that the loan is for $120,000, simplifying the interest payments for your business.
You Don’t Lose Ownership
Many business owners who require short-term cash turn to equity partners and investors. While they can bring expertise and money into a business, there is a downside to working with them. Equity partners typically ask for an ownership stake in your business in return for their money.
Bridge loans are a good alternative if you don’t want to relinquish any of your ownership stake. You maintain control of your business while still getting the money you need.
Navigating Cash Flow Problems
According to business analytics firm CB Insights, 38% of new businesses fail because of poor cash flow. This means they ran out of money or failed to attract new investment. Such failures are heartbreaking for companies that had a positive long-term outlook. Short-term cash flow issues can end a business that’s on its way to profitability.
Businesses in industries with long payment cycles provide a good example. A company may have plenty of work. But if it must wait months for payment on the work it delivers, short-term cash flow problems often result. Bridge loans solve these issues, allowing the company to collect its payments and continue to grow.
The Cons of Bridge Loans
As beneficial as bridge loans can be, there are some downsides. A borrower must consider the following issues carefully when applying for a loan.
Larger Monthly Payments
The short-term nature of bridge loans leads to larger monthly repayments. Most bridge loans have periods ranging from three to 18 months. A traditional business loan could offer the same amount of money repaid over several years.
Larger repayments can cause problems for companies that already have cash flow issues. Furthermore, missing a repayment could lead to penalty fees and the accrual of more interest.
Higher Interest Rates
The shorter loan periods for bridge loans also impact the interest rates attached to them. Bridge loan providers tend to have higher rates because they’ll collect fewer repayments. Some lenders also add origination and closing fees to their bridge loans.
However, you may still pay less total interest on a bridge loan than on a normal business loan. It depends on the length of each loan and the specific rates lenders attach to them.
Risks Related to Future Payments
Imagine you’ve taken out a commercial bridge loan because your clients have long payment periods in their contracts. You’re taking the loan under the assumption you’ll receive your payment from these clients at a later date.
What if that doesn’t happen?
Your client may delay or dispute the payment, or they may go out of business before paying your invoice. Either situation means you don’t receive the money you expected to receive. The cash flow issues this situation creates may cause you to struggle to make bridge loan repayments.
Qualification Requirements for Commercial Bridge Loans
You can get a business bridge loan from a variety of lenders: traditional banks, direct lenders, loan aggregators, or online lenders. While specific requirements vary by lender, in general you can expect the following requirements:
- Fair to excellent credit
- Six months to two years in business
- At least $250,000 in annual revenue
Additionally, you should expect to provide the following for your application:
- Credit score
- Business bank statements
- Balance sheets
- Purpose of the loan
Things to Look for in a Bridge Loan
There are some obvious things to look for when searching for a bridge loan. Favorable interest rates and a simple repayment structure are two of them. Both combine to reduce the loan’s cost and the complexity associated with it. You should also check your lender’s reputation. They should have a track record of good relationships with customers. Look at online reviews from previous borrowers to see what people think of the lender’s service.
More specifically, look for the following in a bridge loan:
- Funding Speed – Though most bridge loan lenders are faster than traditional lenders, no two bridge loan lenders are equal. Some provide funds faster than others. Look for a lender that gives you access to the money you need within an appropriate timeframe.
- Prepayment Incentives – As short-term financial products, bridge loans are meant to be temporary. As such, many lenders offer incentives for repaying the loan early. One example is an amortizing bridge loan, for which early repayment means you avoid some interest. If you take a loan with a factor rate, you pay a set amount of interest regardless. For these types of loans, check if the lender offers a discount for early repayment.
Should You Consider a Bridge Loan?
Bridge loans aren’t intended for large-scale business expenses. Instead, they offer a short-term solution to cash flow issues that may affect your company.
A bridge loan may be right for you if you have such an issue. You can use the loan to fund growth or cover lean months while you’re waiting for payments from clients. These loans can also help you to replace equipment that’s vital to your operations.
However, a bridge loan may not be the best choice if your company has severe financial issues. The higher repayments could make these issues worse, even if the loan offers temporary relief. You may also consider a traditional business loan for more long-term funding challenges.
FAQs About Bridge Loans
How much can I borrow with a bridge loan?
Your maximum borrowing amount varies depending on the lender. Some, such as QuickBridge, offer bridge loans up to $500,000.
How long do bridge loans last?
Repayment periods vary but can be anywhere between three months and three years.
Do business bridge loans require collateral?
Most bridge loans require some form of collateral, such as property or an asset your company owns.
