A small business bridge loan is a short-term loan that is designed to help businesses cover expenses and add working capital. A bridge loan can also help the company meet its financial obligations to creditors and employees. Traditional business financing can be challenging to obtain, especially on short notice.
Often, businesses may find themselves in a situation where they are low on capital. This could be due to several reasons, such as an unexpected opportunity or waiting on a payment from a large deal. No matter the reason, bridge loans are a popular choice for businesses to get cash quickly.
How Much Can I Get with a Small-Business Bridge Loan
The amount of money you can borrow will be determined by the lender you work with. Most lenders will have a cap on the total amount they are willing to loan. In addition, they will also look at your business credit and assets to determine your ability to repay the loan. Some lenders may also require collateral or a personal guarantee before approving a loan.
Another factor to consider is that bridge loans are available in two types: open and closed. The type of loan you choose will also affect the amount you are eligible for and the interest payments. An open bridge loan works like a line of credit because there is no end date.
What Types of Businesses Get Bridge Loans?
Any business can get a bridge loan, but they are common with companies that deal in real estate. Bridge loans work well for those in real estate because they can quickly purchase a house or secure funding for repairs instead of waiting for traditional loans. This can provide enough time to either flip the property or obtain a lower-interest loan. For real estate bridge loans, it is common to use the property being purchased as collateral for the loan.
Another example of bridge loans is for businesses that need inventory or raw materials so they can make large purchases quickly. Businesses will often be awarded large contracts with at least a 30-day term for the other party to pay. This can leave a large hole in a company’s operating budget until the amount is fully paid. Bridge loans are a good option because the business knows they will be paid but needs short-term financing for working capital until then.
Similarly, retailers often need capital, especially before busy times of the year, such as Christmas. The money from the loan is used to fund inventory, whose proceeds will then be used to repay the loan. In all these instances, the businesses expect to quickly recoup their money or secure a long-term loan.
Pros and Cons of Getting a Small-Business Bridge Loan
Bridge loans are a good choice for many situations where businesses need quick access to capital. But there are also some downsides. Therefore, any loan should be carefully considered to determine whether it is prudent.
Bridge loans, used properly, are great, but they have high-interest rates compared to other types of business funding. Therefore, you should always have a plan to either repay quickly or secure long-term funding. You may also need to use your assets as collateral, which could be disastrous should a planned deal go bad.
On a positive note, bridge loans are faster and easier to get on short notice. Commercial loans can often take weeks or longer to get approved and have funds available for you to use. On the other hand, bridge loans can be approved with money in your account in a matter of days. In some instances, you may even be able to get funding within 24 hours.
What Fees and Interest Rates are Associated with Bridge Loans?
Because of the short-term nature and high interest rates, it is easy to get caught up in a vicious cycle if you cannot repay it promptly. If you use a bridge loan for expenses like payroll or utilities, you must be positive about the business’s ability to repay the loan.
Bridge loans through a traditional lender such as a bank, you can expect interest rates to range from 6% to 11%. However, if you cannot meet their criteria, you can also look into alternative lenders, varying from 7% to 30%. Alternative lenders tend to have more leniency, but they will charge a higher rate to offset the added risk.
The duration of these loans can also vary greatly, with some less than a year while others have a term of several years. Other costs may be added, such as origination fees for the loan. These will vary by lender and could even differ based on your borrowing amount. Remember that depending on your business’ age, credit history, and borrowed amount, you may need collateral or a personal guarantee.
How to Apply for a Small-Business Bridge Loan
If a small-business bridge loan sounds right, consider applying with an online lender or meeting with one locally. Applying online is fast and easy with —–. All you must do is fill out the online application, and one of their lending specialists will walk you through your options as well as what you will need to proceed. Once you are approved by —–, you can receive funding as fast as one day.
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