For a small business (or any business,) a bridge loan can mean the difference between failure and survival or between stagnation and growth. A bridge loan is a great way to get cash to meet immediate and pressing expenses.
What is a Bridge Loan?
A bridge loan is a short-term financing solution that can help a company meet its expenses and cash flow needs until it can secure more permanent long-term financing. Bridge loans typically have repayment terms of one year or less. They usually require collateral and generally have higher interest rates compared to other funding sources.
A bridge loan can be used to purchase real estate, expand or renovate real estate properties, purchase equipment, buy foreclosed or discounted assets, and purchase inventory, especially to meet a surge of seasonal inventory needs. They can also be used to pay for normal operating costs including payroll, rent, monthly expenses, and supplier fees.
Compare A Bridge Loan Versus a Conventional Bank Term Loan
A bridge loan:
- Typically has higher interest rates.
- Can be secured more rapidly, typically in 30-45 days.
- Is an interest-only loan compared to a conventional loan which requires the repayment of principal and interest.
- Can be secured by separate assets, while a conventional loan is usually secured against the asset being purchased or improved.
- Has higher creditworthiness requirements because the loan risk is higher for the lender.
- Is a shorter-term loan, with a repayment period of typically 6-12 months.
- Generally, a pre-payment penalty is not attached to the loan.
The Types of Bridge Loans
Bridge loan types include:
- A term loan. This type of loan comes with a specified loan amount and repayment schedule and it can be secured from some banks, credit unions, and online lenders.
- A business line of credit. This type features an established credit line that borrowers can use and draw from as funds are needed, and interest is paid only on what is borrowed. These are exceptionally flexible and convenient.
- Invoice financing. Invoice financing can be used as bridge financing. It allows a business to exchange its unpaid invoices for fast cash. However, the full value of the invoices is not recovered due to the lender’s fees.
- Merchant cash advance. A merchant cash advance is an advance of future credit card sales, less the lender’s fees. Repayment is made based on daily credit card sales rather than on set monthly payments.
- SBA bridge financing. The Small Business Administration offers SBA bridge loan opportunities.
- Commercial real estate bridge loans. A borrower can refinance a current real estate loan using a bridge loan.
- Alternative loans. Alternative lenders offer financing for both real estate loans and working capital loans.
What is Required to Get a Bridge Loan?
Generally, to secure a bridge loan, you will need to have great credit, a low debt-to-income ratio, and you will need to provide equity of 20 percent or more.
Seek Expert Financing Assistance
Contact CapitalAx Commercial Lending, based in Lubbock, TX to get the financing you need to establish and grow your real estate investing business. We offer a wide range of commercial finance programs to help you achieve your goals.