Whether your business is growing quickly or just getting started, you need cash to stay afloat. The trouble is that negotiating with investors or securing a traditional loan can take time – time that you sometimes just don’t have.
That’s where a bridge loan can come in handy.
A bridge loan is a short-term loan designed to bridge the gap between two longer-term financing loans. This type of financing can be a smart and simple solution when you’re in need of quick cash flow. A short-term infusion of capital will allow you to pay off tax liens, replenish cash depleted by the loan process, or simply assist you with managing your business in the interim.
But just as with any other financing tool, it’s important you fully understand how these types of loans work before you sign on the dotted line. Here are the basics:
Types of bridge loans
There are a variety of different ways you can use a bridge loan for your business. Some of the most common types of bridge loans cover operating capital or mortgage payments.
For example, if your mortgage loan becomes due before you find a suitable replacement long-term mortgage loan, you could acquire a bridge loan to pay off the current mortgage. Then, once you’ve acquired the new long-term loan, it will pay off the bridge loan.
Advantages of bridge loans
The biggest advantage of a bridge loan is the speed at which the money becomes available. Most bridge loans can be funded within 24 hours, giving you access to immediate capital. Typically, bridge loans are good for a three-month period. Some can extend up to 24 months.
Another benefit of a business bridge loan is that you can usually pay off a bridge loan at any time without incurring a prepayment penalty. So as soon as your long-term financing becomes available you can pay off the bridge loan without further fees.
Bridge loans aren’t as heavily regulated as traditional long-term loans. This means you’ll likely have to jump through less hoops to get approval.
Disadvantages of bridge loans
The biggest downfall to bridge loans is that they are expensive. Since bridge loans are relatively easy to obtain and result in fast cash, it’s not surprising they also come with higher financing costs.
Just look at the payday loan industry as a comparable example. Payday loans carry a much higher interest rate than a long-term mortgage or auto loans. Bridge loans are no different. A bridge loan carries much higher financing charges than a more conventional long-term loan. This explains why companies use bridge loans as only a short-term solution, instead of as a long-term financing tool.
It’s also important you pay attention to payments before you get a bridge loan. As a short-term loan that’s meant to be paid more quickly, a bridge loan entails bigger regular payments. The lender may also not be as flexible when it comes to late payments because of the length of the loan. Late payments may also incur larger fees and penalties.
A bridge loan can be a practical solution when you need additional capital quickly and waiting for traditional financing is just not an option. But make sure you understand all the ramifications of this type of financing before you proceed.
If you have questions, don’t hesitate to contact us for more information.