A bridge loan is used to cover gaps in financing. These gaps are typically due to timing issues. As a business owner, you know that timing is critical when it comes to business financing.
If you do decide to get a bridge loan, you would be getting short-term funding that will mature once your long-term financing comes in. this gives you access to funds to start your project while you’re waiting on permanent financing. Once the permanent financing comes in, you use the proceeds to pay off the bridge loan.
In this blog, we’ll explain what you need to know about bridge loans to determine if it is a good funding option for your business.
What is a Bridge Loan?
A bridge loan is also known as a swing loan, bridge financing, or bridging loan. It is a short-term option until long-term financing comes in.
Terms and application processes vary depending on the borrower and the lender. For example, if you are a developer in residential real estate, you may plan to apply for a construction loan but need financing to pay for the land. This is where a bridge loan comes in. You would work with a lender that specializes in bridge loans for land.
Some lenders offer bridge loans for startups that need cash while waiting on their next round of funding.
In both of these circumstances, the lenders will have specific terms and requirements for their applications. As a general rule, these loans have a higher interest rate, shorter terms, and strict collateral requirements.
The process is similar to that of a traditional loan and you’ll be expected to provide the following:
• Credit score
• Past business experience
• Proof of down payment
• Financial capacity
Finally, the way you repay a bridge loan depends on what you are using it for. In most cases, there is a balloon payment at the end of the term. That being said, if you are using it for a real estate transaction, it is often structured so that you can use the proceeds of the sale to pay it off.
When Does a Bridge Loan Work Best?
Bridge loans are potentially a good option when you need funding to get started on a project while waiting on permanent financing. There are two circumstances where bridge loans are a great fit:
• Real estate purchases
• Startups between funding milestones
No formula will show you whether a bridge loan is the best option to fund your business. Just like any other type of funding, there are advantages and disadvantages.
Even if it seems like the numbers line up, bridge loans are not necessarily the best option for your business. Typically, it’s expensive and since it’s only a short-term solution, there is little to no room for error.
The pressure of a bridge loan is due can cause some business owners to be too cautious. However, it’s important to note that bridge loans can be used to overcome cash flow issues. So, if you do have long-term financing coming in or a large sale pending that you can use the proceeds to pay off the loan, it might be worth it.
If you’re interested in business funding, contact WHW Capital. We can help you understand your options and get you moving in the right direction.