Bridge Loans: A Short-Term Financing Solution
A bridge loan is a short-term financing solution that closes the gap between what you need now, and what you are going to get in the future. You may have a big order that you are delivering, but the invoice may not be paid for another 60 days. Or you may have found an investor, but the deal won’t receive final approval for a month. Or you may be in the process of securing a long-term loan or business line of credit. In all of these cases, you are expecting to receive cash, but it will not happen until some future date.
If a bank feels that you are likely to pay the loan back, the institution may issue a bridge loan that covers your immediate needs for supplies, overhead and personnel wages and benefits. This loan “bridges” the distance between what is a reality now, and what will be happening in the future. The bridge loan usually carries an interest rate of between 5% and 11%, depending on your credit rating, the length of the term (usually between two months and four months) and other factors that the lender may consider.
Applying for a bridge loan
This short-term financing solution is not available for just anyone. You need to prove that you are credit worthy. Also, you need to show that your monthly sales – outside the expected cash infusion – are enough to support payments on your bridge loan. The lender will expect you to make reasonable payments over the term of your bridge loan, and then when the expected capital arrives, you will be expected to pay off anything remaining on the loan.
In some cases, a bank may require some sort of asset in return for a bridge loan. The bank may require you to secure your funding with inventory or accounts receivable. Or you may have to put up your business building as collateral. Sometimes, and this is becoming more common in the current economy, you may be rejected. In such cases, you may have to go elsewhere for a bridge loan.
Factoring companies can help you with a bridge loan when traditional financing fails you. With factoring, you offer specific invoices to the factor, and receive cash payment up front. You pay a fee, and the factor will give you between 50% and 90% of the face value of the invoices. When the factor collects on the invoices, you receive the remainder.
You can also get equity investors to provide your business with a bridge loan. In this arrangement, you receive capital as an advance. The investors expect that an equity deal you may be making will go through, and the advance is based on a stock purchase. There are other arrangements, such as a convertible note, that can be explored in this form of a bridge loan.
If you know that you will be receiving a cash infusion soon, it can help to have a bridge loan. It will keep you business going until the expected cash arrives, and you will be able to maintain – or even grow – your operations in the meantime. However, it is important that you understand the terms properly, and that you realize that if you get a bridge loan you will be expected to deliver.
Related Article: Financing Your Business With a Line of Credit >>