What Is a Bridge Loan?

A bridge loan is designed to provide a business with access to capital quickly to address an opportunity while it works to secure longer, more permanent financing. Similar to a small business loan, it offers a business a lump sum of capital with fixed payments and terms. However, bridge loan terms are designed to offer short-term durations than traditional small business loans.

Think of a bridge loan as opportunistic capital or gap funding. While some business opportunities can be planned for, some may come unexpectedly. Many businesses use bridge financing for working capital in advance of long-term financing, an infusion of equity, credit cards, or expected but delayed revenues.

Applying for a traditional loan with a bank can be a long and often exacting process. Further, applying for any type of financing with a bank has a high chance of rejection. Many small and medium-sized businesses (SMBs) need financing – when they need it. A bridge loan can solve this problem.

From application to funding, securing a bridge loan is significantly faster than traditional loans. The expedited process makes it an attractive option for companies in urgent need of financing.

It can be used to meet a variety of business needs such as payroll, inventory purchases, new equipment, kicking off remodeling, or down payments towards new real estate.

The bottom line is that bridge loans create business flexibility and increase working capital, which makes it possible to secure short-term needs while awaiting long-term financing.

How does a Bridge Loan Work?

Since bridge loans are short-term funding solutions, typically structured to last only a few months to a year, they’re designed to be paid off quicker. Payment structures can be setup to be repaid daily, weekly, or monthly. Due to these short repayment terms, interest rates and fee structures can also be higher than business loans.

If a bridge loan is secured, which means borrowers are expected to put up collateral to back the loan, the collateral used to back a business bridge loan is typically real estate or capital equipment. There are also unsecured bridge loan options for businesses as well.  While structurally the same, features like term, rates, and fees may be higher due to a lack of secured collateral.

As an incentive to repay the bridge loan back sooner, some lenders will offer an added feature like an early payment discount, which offers a borrower the ability to receive some sort of financial incentive for accelerating the repayment of the loan. Benefits like this offer a win-win for both lender and borrower.

How Do I Get A Bridge Loan for Business?

Bridge financing can be obtained from a variety of sources, whether it’s a venture capital firm, investment bank, or an alternative lender. If approved, financing may be provided as either a loan or an equity investment; however, most business owners prefer the former, as it allows them to maintain control over their company. Typically, online or Fintech lenders offer the most flexible criteria, terms, and options for SMBs.

Bridge Loan for Business: Pros and Cons

Now that we know what bridge financing is and how it works, let’s look at some pros and cons.

Pros

·       Obtaining abridge loan is faster than other loan options. This makes it particularly suited to businesses in need of immediate capital.

·       Bridge loans help companies avoid cash flow problems caused by long payment cycles or distributions.

·       Bridge loans allow businesses to leverage their business to acquire new property, remodel their existing location or secure capital equipment for the business.

·       Some bridge loans offer creative takeout features like early payment discounts.

Cons

·       Bridge loan payments have higher installments than other loans.

·       Bridge loans may be subject to higher interest rates and fees than other options.

·       Bridge loans can be risky if the expected long-term financing source is delayed or falls through.

Securing a Bridge Loan is Fast and Easy, With Capital Reaction

Bridge loans are excellent short-term financing options, especially for companies who need a financial source for real estate or a fast capital infusion.

If you are an SMB in need of fast, short-term financing? Consider a bridge loan through Capital Reaction. We typically can get you from application to funding in as little as 24 hours.  Also, our approval rate are much higher than traditional banks.

Contact us now to discover how a true Capital Reaction can help you “bridge” your short-term goals with your long-term business plans!