3 Ways Small Businesses Might Use a Bridge Loan
Bridge loans provide immediate cash flow and are a good short-term option while waiting for a better long-term option. The money can cover expenses in the meantime, such as rent, utilities, payroll, and inventory costs. These loans come with high interest rates and are backed by collateral such as inventory or real estate. They are faster to approve than traditional loans but come at a higher cost.
For businesses involved with real estate, the bridge loan helps with lag times between the purchase of one property and the sale of another. Some lenders may not have set debt-to-income ratio or FICO score guidelines while others may have strict criteria, limited to those with the highest credit ratings and low debt-to-income ratios. The mortgages of two properties are combined, allowing the real estate buyer flexibility while waiting for the old property to sell. In some cases, monthly payments on the bridge loans are not required immediately.
If your business needs capital immediately, you can receive funds from a bridge loan in as quickly as 48 hours. It’s fast funding to ensure that your business operations can continue and don’t come to a sudden halt. If your business needs to make a major emergency purchase, the funding helps you make a down payment. If equipment breaks down or is obsolete, the bridge loan helps your business make the new equipment purchase so that work and production continues, at possibly a higher level of efficiency. You can make payroll and add to your payroll, hiring new employees and expanding your team. You can weather delayed payments from customers and make payments to vendors. The funds also help if you have a seasonal business and the revenue generation is inconsistent.
When you need to keep positive cash flow in your business and hold off threats such as tax liens, the bridge loan makes a better option than getting other types of loans, where you may also have to submit greater financial documentation or be required to give away equity in your company to an investor to keep your business afloat. Using a bridge loan keep cash reserves intact and do not involve using existing working capital financing.
Bridge loans are short-term, ranging from a few weeks in duration, up to twelve months. The intent of these loans is that it’s temporary until your business receives a cash infusion or finds a less expensive, longer-term financing option. Whether a business hits a problem or an opportunity, the bridge loan is available when something comes up to benefit the business.