Last Updated on January 2, 2023
When used right, business bridge loans can prevent your business from experiencing financial issues. With a stable cash flow, you can take in more customers and invest in business opportunities to grow your business.
Unfortunately, a lot of businesses often misuse bridge loans. As a result, many of them usually end up in more debt, making it harder for them to keep their doors open.
To maximize the benefits of a bridge loan and utilize it to help in the success of your business, you have to know how it works. This article will outline what a bridge loan is and discuss the advantages and disadvantages of utilizing one.
What is a Bridge Loan?
A bridge loan, also known as a swing loan, is a type of short-term business financing designed to resolve temporary cash flow issues. It could be cash flow gaps, emergency business situations, or time-pressing business opportunities such as stock sales or partnerships. Typically, when business owners apply for a bridge loan, they would do so with the intention of paying it off quickly or refinancing it because of its expensive nature.
Bridge loans for businesses work similarly to those bridge loans people use for real estate. The difference is that instead of the cash going into real estate, the additional cash flow boost will be used towards business initiatives, like business acquisitions or inventory.
Business Bridge Loan Pros and Cons
Bridge loans can be a lifesaver for any business experiencing cash flow shortages. However, in deciding whether you should go through with the application or not, it’s vital to consider the pros and cons.
Business Bridge Loan Advantages
Easy Application Process
The process of obtaining a bridge loan, from application to Approval, is much faster than traditional financing. With a faster turnover, companies can quickly receive funding which they can then use towards obtaining equipment, funding projects, or pay their staff.
Bridge financing can especially come in handy when you’re trying to get a leg up on time-sensitive projects. For instance, when a business is selling, or you’re working on winning a bid on real estate, the cash you have will give you the advantage so you can beat other bidders and win the business or property.
Flexible Payment Terms
With bridge loans, business owners can have the choice of whether they want to pay off the loan before or after they’ve secured a more comprehensive, long-term business financing. With that, you won’t have to struggle to make ends meet while you wait for loan approvals. It will also make sure that your cash flow won’t be affected while you’re in the process of securing another business financing.
Most lenders that offer bridge loans also don’t charge a prepayment penalty. This means that if business owners plan to pay off the loan earlier than what was agreed, they won’t have to pay for early termination fees.
Less Documentation Needed
Considering that they’re short-term loans, bridge loans only require borrowers to submit minimal documentation, unlike traditional financing. At the very least, all the business needs to submit are their business and personal bank and credit statements. These documents will help the lenders assess and evaluate whether you would be able to repay the loan back in time.
Quick Approval and funding
One of the reasons why bridge loans are one of the most sought-after business loans is because of the fact that approval is typically faster. In most cases, online lenders can approve a bridge loan application within 24-48 hours. Once approved, the lenders will transfer the funds to the business’ accounts in no more than a week.
Business Bride Loans Disadvantages
In general, bridge loan repayment terms can be as short as 3 to 18 months. That said, you can expect larger monthly repayments compared to other financing products. If you’re late on repayments, the penalties could add up, making repayments even harder for the business.
Higher Interest Rates
Since payment periods are shorter in bridge loans, businesses won’t be paying interest for the loan for long, and lenders are very well-aware of that. In turn, their way of making it up is to charge higher interest rates.
It’s a much riskier type of business financing
If you’re relying on the proceeds of a specific project to repay the loan you took out, it should be noted that there’s still a slight risk of the payments falling through. It could become a huge problem for the company as it could result in another significant, unexpected expense. This situation puts the company further into debt, thus increasing their debt-to-income ratio and making it harder for them to continue running their business.
Business Bridge Loans: Final Thoughts
Business bridge loans are a viable financial resource to use if your company is experiencing some short-term cash flow issues or pursuing a time-pressing business opportunity. But before applying for one, learning more about the advantages and disadvantages of financing would be a smart step to take, especially if you know little about it. With an idea of how it helps your business, you’ll have a better sense of how you can use it to lead to the most gains for your company.