When opportunity knocks, you answer the door. But the thing about opportunity is, it doesn’t always present itself at, well, opportune times. Bridge financing is your solution. As the name implies, this short-term form of funding serves as a “bridge” between your immediate need for capital and a long-term financing solution (or an expected influx of cash).

Consider this example: A prime storefront in your town hits the market. Interest in the property is high, and you need to act fast, but you don’t have the capital in the bank to buy the property outright. Given the level of interest, you know the seller won’t wait while you get all of your financial ducks in a row to apply (and qualify) for a commercial real-estate mortgage.

To swoop in and purchase the storefront, you secure a bridge loan. In general, bridge loans are quick-to-fund and easy to qualify for, making them a useful tool small business owners can leverage when faced with an urgent need for cash.

What Is Bridge Financing?

Bridge loans don’t represent a particular loan type. Any loan that is quick-to-fund can be considered bridge financing if it’s used to tide a business over while it waits for an inflow of cash.

The funds can be used to act on a time-sensitive opportunity or sustain the business when cash reserves are low. In either instance, a borrower enters into a bridge loan agreement with the intention of paying it off quickly or refinancing it with long-term funding.

The Characteristics of Bridge Loans for Business

Now that we answered what bridge financing is, let’s take a close look at its characteristics.

  • Stop Gap Measure: As we’ve already covered, small business bridge loans are a form of interim financing. They “bridge” the gap between an upcoming expense and an influx of capital, such as a loan, mortgage or proceeds from a sale.
  • Short Term: In contrast to its long-term counterpart, bridge loans cover a short period, with terms as short as 3 months and as long as 5 years.
  • Quick to Fund: Most importantly, bridge loans must be quick to fund. For this reason, alternative lenders—with their streamlined online applications and abbreviated underwriting processes—have become the 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.
  • Non-Restrictive: Bridge loans are most commonly 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.

Common Bridge Financing Use Cases

The concept of commercial bridge loans is easier to understand when you consider it in a real-world setting. Let’s explore common use cases for bridge financing to see how they work and what that can mean for your 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, as we described in our opening example. Once a property is secured, the bridge loan can be refinanced with a more affordable and long-term mortgage.

Others use bridge financing to rehab 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. In this situation, a business owner might decide to fix up the building first, then secure a mortgage. They can use a bridge loan to purchase the property  and fund the renovations, then refinance the newly rehabbed property with a traditional mortgage.

Sustaining Business Before Acquisition

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

Bridging Gaps in Cash Flow

Business owners and companies can also use bridge loans to finance working capital and cover expenses as they await an influx of cash. Bridge loans can cover costs such as utility bills, payroll, rent and inventory costs.

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

  • Service Companies: A business in the service industry typically gets paid at the beginning and end of a job. Bridge financing can tide operations over while they await final payment.
  • Manufacturers: Manufacturing companies 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 loan.

4 Types of Small Business Bridge Loans

If you determine that bridge financing is the best solution for you, we’ve outlined four popular options below, including a list of pros and cons for each product type:

Business Line of Credit

Loan Amount
$5,000 – $500,000

Repayment Term
6 months – 3 years

Interest Rate
Starting at 8%

Speed of Funding
As fast as 1 day

A business line of credit is comparable to a business credit card, but with higher limits and stricter repayment terms. 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
  • Can have costly fees
  • May have to re-submit paperwork to reuse funds

 

Short-Term Loans

Loan Amount
$3,000 – $500,000

Repayment Term
3 – 18 months

Interest Rate
Starting at 10%

Speed of Funding
As fast as same day

Short-term loans are similar to traditional term loans, but are smaller in scale and have much shorter repayment schedules (18 months or less).

Pros

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

Cons

  • Can be expensive
  • Accelerated repayment schedule (daily or weekly)

 

Accounts Receivable Financing

Advance Amount
Up to 80% of receivables

Repayment Term
Until receivables are paid in full

Factor Rate
Starting at 1.02

Speed of Funding
As fast as 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’ bad credit could disqualify you
  • No guarantee of invoice collection
  • Recurring weekly fees

 

Merchant Cash Advance

Advance Amount
$3,000 – $500,000

Repayment Term
3 – 18 months

Factor Rate
Starting at 1.14

Speed of Funding
As fast as same day

In Merchant Cash Advance financing, 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 to traditional forms of financing, bridge loans are 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.

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

If we return to the real estate example, the bridge loan enabled the purchase of a highly sought after storefront. Though the purchaser will have to pay higher interest rates on the bridge loan until it is refinanced, the benefits far outweigh this con. As a result of this new location, the business owner expects their traffic (and respectively their sales) to increase exponentially.

Therefore, spending “x” to achieve “y” is the appropriate consideration.

Refinancing Bridge Loans

By definition, bridge loans are a temporary capital solution. Therefore, it’s critical for business owners to identify a clear exit strategy. If you do not 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, an SBA loan is an excellent option to consider.

SBA loans can be as large as $5 million, with repayment terms as long as 25 years, and interest rates as low as 6 percent. These terms are favorable because the SBA guarantee backs SBA loans and reduces the overall risk for lenders.

The Final Say on Bridge Financing

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.

Ready to find out more? Call 1-800-735-6107 or connect directly with a Business Advisor.

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