Bridge financing — as the name implies — is short-term funding that serves as a “bridge” between your immediate need for capital and a long-term financing solution (or an expected influx of cash).

Let’s dive into what is a bridge loan, the pros and cons of bridge loans and whether this financing product is right for your business.

What Is Bridge Financing?

While not representing a particular loan type, a bridge loan by definition is short-term financing that’s used to help tide over a business during a temporary cash crunch. The funds can be quickly provided and also used to act on a time-sensitive opportunity or sustain the business. 

Bridge financing can be taken out and repaid over a few months or sometimes 2 years. A borrower enters into a bridge loan agreement with the intention of quickly paying it off or refinancing it with long-term funding.

Business Bridge Loan Characteristics

  • A Stop-Gap Measure: Small business bridge loans “bridge” the gap between an upcoming expense and an influx of capital, such as a loan, mortgage or proceeds from a sale.
  • For the Short Term: How long can you get a bridge loan for? Bridge loans’ terms can be as short as 3 months or as long as 2 years.
  • Quick to Fund: Bridge loans must be quick to fund. For this reason, alternative lenders — with their streamlined online applications and abbreviated underwriting processes — have become a go-to resource for small business owners in need of interim financing. Depending on the lender and circumstance, funds can be secured in as little as one day.
  • Nonrestrictive: Bridge loans most commonly are used for property acquisitions, but they can be leveraged to address any business expense.
  • Flexible Terms: Borrowers can choose to pay off a bridge loan before or at maturity. For this reason, ideal bridge loans for small businesses are free of prepayment penalties.

How Does a Bridge Loan Work?

Let’s explore a few common uses for bridge financing to see how they work and what that can mean for your small business.

Investing in Commercial Real Estate

When many hear the term “bridge loan,” commercial real estate comes to mind. Business owners will take on bridge loans to jump on a stellar real estate deal, and once a property is secured, the real estate bridge loan can be refinanced with a more affordable and long-term mortgage.

Others use bridge financing to rehabilitate a property. A building may be in the perfect location and offer the desired features, but the structure itself might not meet a lender’s requirements. A business owner might decide to fix up the building first, then secure a mortgage. They can use a real estate bridge loan to purchase the property and fund the renovations, then refinance the newly rehabbed property with a traditional mortgage.

Bridge loans are commonly used in real estate

Sustaining Business Before Acquisition

Distressed businesses can take out bridge loans to ensure smooth operations while they search for a large investor or acquirer. In this scenario, the business has an impending source of capital lined up — investor funds or the proceeds of the sale — as an exit strategy from the bridge loan.

Bridging the Gaps in Cash Flow

Business owners and companies can also use a bridge loan to finance working capital and cover expenses. Short term bridge loans can cover costs such as utility bills, payroll, rent and inventory costs.

Here’s how businesses in different industries might use a business bridge loan to address a temporary gap in cash flow:

  • Service Companies: Many businesses in the service industry get paid at the beginning and end of a job. Bridge financing can tide operations over while they await final payment.
  • Manufacturers: Manufacturing companies tend to have high capital needs. The process of fulfilling a large order includes the cost of making the product and delivering it to the customer. And like businesses in the service industry, manufacturers typically get paid after the product is delivered. Bridge loans are vital to sustaining this type of business model.
  • Seasonal Shops: Seasonal businesses need to stock up on inventory and staff before the annual rush. Short-term bridge financing is ideal in such scenarios. Funds can be used to prepare the business for the season, and the subsequent revenue can be used to close the small business bridge loan.

4 Types of Small Business Bridge Financing

If you determine that bridge financing is the best solution for you, we’ve outlined 4 popular options offered at Fast Capital 360, including a list of pros and cons:

1. Business Line of Credit

Loan Amount
Up to $250,000

Repayment Term
6 months – 2 years

Interest Rate
Starting at 8%

Speed of Funding
As fast as 1 day

With a business line of credit, your lender authorizes a set amount of funds from which you can draw money from whenever you need. You pay interest only on the funds you borrow.

Pros

  • Use flexibly
  • Pay interest only on the funds you borrow
  • Build your credit

Cons

  • Collateral may be required
  • May have costly fees
  • May have to resubmit paperwork to reuse funds

 

2. Short-Term Loans

Loan Amount
Up to $500,000

Repayment Term
3 – 18 months

Interest Rate
Starting at 10%

Speed of Funding
As fast as the same day

Short-term loans are similar to conventional term loans, but are smaller in scale and have much shorter repayment schedules.

Pros

  • No long-term commitments
  • Limited paperwork
  • Fast approvals
  • Variety of uses

Cons

 

3. Accounts Receivable Financing

Advance Amount
Up to 80% of receivables

Repayment Term
Until the receivables are paid in full

Factor Rate
Starting at 1.02

Speed of Funding
As fast as the same day

Accounts receivable financing turns unpaid invoices into capital. Lenders charge a weekly fee until your customer pays off the financed invoice.

Pros

  • Near-immediate access to cash
  • Low qualification requirements
  • No collateral required

Cons

  • Clients with bad credit could disqualify you
  • No guarantee of invoice collection
  • Recurring weekly fees

 

4. Merchant Cash Advance

Advance Amount
Up to $500,000

Repayment Term
3 – 24 months

Factor Rate
Starting at 1.10

Speed of Funding
As fast as the same day

With merchant cash advances, a lender gives you a set amount of cash upfront. You repay this advance plus their fees with a percentage of your sales.

Pros

  • Low qualification requirements
  • No collateral required

Cons

  • Can be expensive
  • Daily repayment

Bridge Loan Fees and Expenses

Compared with typical forms of financing, a bridge loan is generally more expensive with higher interest rates and fees. Before coming to terms on a bridge loan agreement, weigh the costs of funding short-term against the benefit of being able to act on an opportunity or sustain the business.

In general, borrowers accept these terms because they require fast, convenient access to funds. They are willing to pay high interest rates because they know the bridge financing is short term and plan to pay it off quickly with future proceeds or low-interest, long-term financing.

Refinancing Bridge Loans

Because a bridge loan is a temporary capital solution. it’s critical for business owners to identify a clear exit strategy. If you don’t anticipate a sudden inflow of cash, you will need to refinance your bridge loan with a longer-term solution. If you lack the credentials to qualify for a traditional bank loan, a Small Business Administration (SBA) loan is an excellent option.

SBA loans can be as large as $5 million with repayment terms as long as 25 years and interest rates can start as low as Prime plus 2.25%. These terms are favorable because the SBA guarantees a percentage of these loans, reducing the overall risk for lenders.

An illustration of a bridge loan to represent bridge financing.

Is Bridge Financing Right for Your Small Business?

Bridge loans are valuable tools in any small business owner’s financial toolbox. With them, you can act on cash-flow emergencies and seize unexpected business opportunities. While rates and fees may appear prohibitive, weighing the actual cost of financing against the benefits of the action funding enables often proves otherwise.

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