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Companies sometimes need immediate access to cash to accomplish an important objective before they can seek more permanent funding to finance their project or business ventures. A bridge loan can help with this – but what is a bridge loan?
These loans are specialized loans designed to bridge the gap before a long-term financing solution becomes available.
Companies can use bridge loan financing to access capital during the gap between lender relationships, start a company for the first time, or keep a company afloat while it waits for an influx of investor cash.
Any individual or company that needs short-term loans should understand the definition of a bridge loan, as this type of loan may be just what they are looking for.
This guide will explain what bridge loans are, how this type of financing works, what types of businesses could benefit from bridge loans, the pros and cons of using these temporary loans, and how to decide if bridge loans are right for your company.
Bridge Loan Definition
A bridge loan is a short-term financing option to meet an immediate need.
Businesses may need short-term funding to bridge a gap or capitalize on an opportunity. That's where bridge loans come in.
There are many different kinds of business bridge loans to meet the different needs companies might have. One type is an equipment bridge loan used to purchase vital equipment that a company needs to turn a profit. Other types include construction bridge loans and more.
Most loans have terms lasting between six and 18 months, and there may be fees, including origination fees and exit fees, that borrowers are expected to pay.
Unfortunately, these types of loans can be much more expensive than stable, long-term financing. However, the high interest rate and high fees may be worth paying when there's no time to gain approval for more permanent funding or when a temporary obstacle stands in the way of being approved for a long-term loan.
How Do Bridge Loans Work?
There are many situations when securing permanent financing isn't possible right away. For example, a business may want to buy equipment and use it as collateral for a line of credit, but that equipment might be costly or require repairs. Naturally, this can lead to unexpected expenses as well.
Bridge loans can solve this problem by offering temporary funding until permanent financing comes through. Typically:
- The business will apply for the loan and get approved quickly if the company meets the lender's bridge loan requirements.
- The company can choose from different kinds of loans, including an interest-only bridge loan, to keep costs down, as bridge loans often have high rates and fees.
- The company moves forward with the necessary steps to secure permanent financing.
- The company pays off the bridge loan once the long-term financing is secured.
There are some big bridge loan risks, including the risk that the borrower will ultimately be unable to qualify for the permanent financing expected to pay off the bridge loan.
However, despite the risks, companies may need to rely on this type of loan if they have a short-term funding need (like a merger or an expansion plan) and can't get capital any other way.
Which Businesses Benefit from Bridge Loans?
Many different businesses could benefit from bridge loans, including:
- Companies involved in the M&A process that need funding to operate pending a merger or acquisition.
- Companies with cyclical cash flow so they can afford to fund operations until they can collect customer payments.
Many businesses rely on this type of short-term funding, but any business that needs a quick influx of capital and plans to pay it back in a few months may wish to look into these loans.
Bridge Loans vs. Traditional Loans
Beyond asking what a bridge loan is, it's also important to understand how these loans differ from more traditional loan types.
Here are some of the biggest differences:
- Loan requirements: Qualifying for bridge loans is usually easier than securing more traditional loans, as bridge loan lenders may have more relaxed loan approval requirements, especially if future long-term financing is confirmed.
- Speed: Lenders can fund these short-term loans very quickly since the goal is immediate access to cash.
- Loan payoff period: The repayment period for bridge loans is generally very short, with borrowers required to pay the loan in full within a few months.
- Loan costs: The costs are typically much higher for bridge loans, including a higher origination fee and interest rates. That's because these loans usually present a significant risk of default if permanent financing doesn't come through.
Bridge loans are just one of many options. If you need short-term financing for a specific purpose, such as paying for inventory until it is sold, options like accounts receivable financing may be your best choice.
Pros and Cons of Bridge Loans
There are both pros and cons to this type of loan. Here are some of the biggest benefits and disadvantages.
| Bridge Loan Pros | Bridge Loan Cons |
|---|---|
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How To Qualify for a Bridge Loan
The process of qualifying for short-term funding can vary based on lender and loan type. For example, lenders typically offer bridge loans to borrowers who meet the following requirements:
- Good credit: Borrowers usually need a good business credit score, which is typically defined to be around 680 or above. This is necessary to show they have been responsible for debt payments.
- Financial statements: Any company that wants to secure short-term funding must provide certain financial statements, including profit and loss statements, cash flow projections, and balance sheets.
- Project feasibility. When the loan funds are used for a specific project, such as buying a new piece of heavy machinery, the lender will want to know if your business plan is feasible or not.
- Past experience: The borrower should have demonstrated past experience with bridge loans. This requirement helps prevent inexperienced business owners from borrowing and getting in over their heads.
Borrowers should check with their lenders to determine what specific documents or requirements they must meet to maximize their chances of approval.
What to Expect When Applying
When your business is facing a time-sensitive opportunity or a critical cash flow gap, securing a bridge loan needs to be a streamlined and efficient process. While it's generally faster than obtaining conventional loans, understanding what to expect will help you prepare and move forward with confidence.
Finding the right bridge loan lenders: Not all lenders specialize in business bridge loans. It’s crucial to seek out bridge loan lenders who understand the nuances of short-term business financing and cater to your specific industry (e.g., manufacturing, e-commerce, construction).
These specialized lenders often have more flexible underwriting processes and a deeper appreciation for the unique challenges and opportunities faced by businesses like yours. They're more likely to evaluate your business comprehensively, beyond just credit scores, looking at your overall financial health, collateral quality, and the strength of your exit strategy.
Documentation and information gathering: While the approval process is expedited, lenders still require a clear picture of your business's financial standing and your proposed use of funds. Expect to provide:
- Business financial statements: Recent profit and loss statements, balance sheets, and cash flow statements.
- Tax returns: Both business and sometimes personal returns, to give a holistic view of financial stability.
- Business plan and projections: A clear outline of how the loan will be used and how it will be repaid. This is especially important for demonstrating your exit strategy.
- Collateral details: If the loan is secured, you'll need documentation related to the asset(s) being used as collateral, such as real estate appraisals, equipment lists, or accounts receivable aging reports.
- Legal documents: Business registration, operating agreements, and other relevant legal paperwork.
- The application process and speed: How long does a bridge loan take to approve? This is a common question, and the answer is usually much faster than traditional long-term loans. Once you submit a complete application with all required documentation, many specialized bridge loan lenders can provide an approval decision within days, and funding can often be disbursed within a week or two.
The application process and speed: How long does a bridge loan take to approve? This is a common question, and the answer is usually much faster than traditional long-term loans. Once you submit a complete application with all required documentation, many specialized bridge loan lenders can provide an approval decision within days, and funding can often be disbursed in under a week.
Explore Financing Options With National Business Capital
Bridge loans are a vital source of funds, providing companies with opportunities they otherwise would not have because financing issues could stand in the way.
Companies that need short-term funding should reach out to National Business Capital to explore options for securing flexible bridge loans.
Whether you're in the construction industry, awaiting acquisition and need operating capital, or have any other pressing need for funds you expect to pay back quickly, National Business Capital can help provide an affordable and efficient borrowing solution and a team of expert business advisors to meet your needs. Apply now for a bridge loan to get your project started.
ABOUT THE AUTHOR
Joseph Camberato is the CEO & Founder of National Business Capital, where he has led the company in funding more than $2.5 billion for growth-minded businesses since 2007. With firsthand experience building NBC from a startup into a national private lender, Joe writes on the economic forces shaping access to capital, including interest rate shifts, private credit trends, and the challenges mid-sized companies face when banks pull back.
