Capital and its availability play a huge role in business operations. In fact, it’s fair to say that capital is modern-day businesses’ major lifeblood, a vital resource that keeps the whole show going.
Having sufficient capital on hand allows your business to operate efficiently so that your team can meet customers’ needs and expectations. Not only that but capital is useful in expanding into new markets in a bid to increase current consumer base and improve cash flow.
In the event of insufficient capital, there are many options business owners like you can tap into to obtain access to readily available capital. Small businesses can secure financing through a combination of bridging loans, customized lines of credit, and credit cards, each offering unique benefits such as short-term liquidity, flexible borrowing options, and convenient access to funds for various business needs. If you’re planning to finance a business move and are confident that you can pay up the loan for a short period, you can consider taking up a bridge or bridging loan. But what is it and is it the best choice for your company?
This blog outlines what you need to know about bridging loans and the different scenarios where it’s very advantageous for entrepreneurs like you. Continue reading to learn more.
What Is A Bridge Loan?
Also known as a swing loan, a bridge or bridging loan is short-term financing that serves as an additional source of funds for a business. This type of financing usually has a term loan of six months to one year. Referred to as a secured loan, you’ll have to use assets such as land, business assets, and others as collateral when you sign up for a bridging loan.
Compared to traditional long-term loans, bridge loans usually have relatively higher interest rates mainly because they have a shorter tenure and are supposed to serve as a ‘bridge’ between short-term cash needs and long-term goals.
Picture the following. You’re an entrepreneur looking for available land for business purposes. Unfortunately, conventional banks may take a while before they approve your loan. If you need to snap up land in a competitive land market, a bridging loan for land can be very helpful.
How Do Bridging Loans Work?
Bridging loans are short-term financing business owners can maximize when long-term financing isn’t available yet. They’re not designed to cater to a company’s extended financial goals.
Bridge loans work by providing entrepreneurs with easy and quick access to much-needed capital, albeit the high interests, intended for expansion of operations and so on.
For instance, your business needs to upgrade its current machinery and equipment in anticipation of a surge in product demand. Luckily, your team has foreseen this and applied for a loan months ago, and was just approved recently. However, the bank will take a few more weeks before they release the funds.
To be able to upgrade your current equipment for work, a bridge loan can provide you with the quick funding that you need to pay for a short period and at a much higher interest. Plus, the machinery that you’ve bought will serve as collateral.
When To Use Bridge Loans?
Wondering when can you use a bridge loan for your business? Check out the examples below:
To Take Advantage Of A Real Estate Opportunity:
Sometimes, you might see a listing in the local directory, but unfortunately, you don’t have enough money to purchase the property for business purposes.
You can use bridging loans to buy a property that has just gone on the market even though you’ve got no cash. And once you’ve acquired the property, you can refinance the high-interest loan with a more pocket-friendly long-term loan.
To Cover Working Needs:
If you don’t have enough working capital on hand, this could affect your business’ ability to meet current and short-term obligations growth, bogging down productivity and efficiency. If you’re in such a situation, you may need a bridging loan to access much-needed cash.
To Invest In A Fix-And-Flip Project:
If you’re involved in the real estate business, one way of making big bucks is by doing fix-and-flips.
Fix-and-flips are business transactions when a buyer purchases a ‘distressed’ property at a significantly lower price tag, renovates it, and then sells it for profit. Nonetheless, these projects are very competitive, so you need to always have capital ready for purchase.
Bridge loans will allow you to access money faster to take advantage of immediate real estate opportunities. Once you have completed the sale, you can use the amount to repay the loan without worrying about refinancing.
The examples mentioned above are just a few instances wherein a company owner can take advantage of bridging loans for business. The list isn’t exhaustive, and bridging loans can be utilized depending on your company’s case.
What Are the Benefits of Bridge Loans?
Bridging loans bring forth the following advantages to the table:
Fast Access To Much-Needed Funds:
It might take weeks, if not months, to access badly needed capital when applying for traditional bank loans. But bridge loans offer an effective solution to access finances quickly. Today, you can use many reputable loan brokers to access money within days via bridge loans.
Due to their shorter processing period, bridge loans can be used to handle financial emergencies, such as repaying taxes. Although the offered amount is usually smaller than typical bank loans, you can use it to cover temporary business expenses quickly and easily while awaiting approval for long-term financing.
Available For All Purposes:
Because bridge loans are asset-based lending, as long as you have met the lender’s borrowing requirements, you can use bridge loans for any legal purpose. Some requirements you must meet include sufficient security and an effective exit strategy. In most cases, you won’t be asked to show proof of income, which further simplifies getting a bridge loan.
As mentioned above, bridge loans can be used to cover several scenarios. For instance, you can use the funds to buy a property at an auction.
Indeed, bridging loans are very helpful to company managers that need easy access to capital. Do keep in mind though, they come with disadvantages as well.
What Are The Cons Of Bridging Loans?
Despite the benefits, your business might encounter several challenges when you opt for bridge loans. They include:
Higher Interest Rates:
Typically, bridge loans have a shorter loan term. For this reason, the rates are usually higher than with permanent financing. Also, if you can’t pay on time or refinance it, you may pay costly late fees and penalties.
There’s a Need for Collateral:
As mentioned above, bridge loans are secured, i.e., you’ll be required to offer collateral as security. If you don’t have sufficient equity to secure the debt, you might find it hard to get a bridge loan to cover temporary needs.
To find out more possible drawbacks with bridging loans, make sure that you consult with your lender about them.
Are Bridging Loans Ideal For Your Business?
Before you decide whether to avail yourself of bridging loans for your business or not, make sure that you have a clear financial goal in mind; weigh in the various pros and cons and make sure that the former outweighs the latter. Lastly, before entering a bridging loan agreement, ensure that you fully understand the terms and conditions set forth and that you’ll be able to meet them.
Capital and its availability are very important in running a successful enterprise. If your business is in dire need of fast capital and is frustrated with the slow processing and releasing of funds from traditional loans, you can consider taking up bridging loans. Check out the points mentioned above that aim to discuss what bridge loans are, how they work, and the pros and cons surrounding them.