You may have heard of a bridge loan for buying a home, but bridge loans are also available to businesses looking to utilize a temporary loan while waiting for more long-term capital to fund their next move. Without a bridge loan, it can be difficult to progress and grow as a company.
If you think your organization may benefit from this type of loan, you’ll want to understand the details of this option, including pros, cons, and whether you should consider one for your business.
What are bridge loans?
Fundera defines bridge loans as “quick-to-fund loans that borrowers take on for time-pressing expenses with the intention to refinance them or pay them off quickly because of their expensive nature.”
Commercial or business bridge loans work the same way as bridge loans in real estate, but they instead go toward a variety of pressing business expenses rather than just property.
Businesses can use bridge loans during “waiting periods” in which they have not yet received long-term funding for a commercial property or other expenses, like inventory or acquisitions.
You can obtain bridge loans from hard money lenders and alternative lenders, and less commonly from banks or credit unions. You’ll have to apply for the loan to see if you qualify; and, if you do, you’ll receive funding usually within one week.
However, the process of repaying bridge loans is different from that of traditional loans. Because they’re such immediate yet short-term solutions, they require quick payoff (terms typically range from a few weeks to up to 12 months). They also often have higher interest rates than other types of financing (15-24% APR), and may also include some up-front fees.
Pros and cons
Bridge loans can feel like lifesavers to many business owners. However, making any decisions, you’ll want to consider the pros and cons:
Pros
- They’re quick to fund. If you’re approved for the loan, you have access to that money almost right away, usually within one week. In other words, you won’t have to wait months for the coverage you need right now.
- They’re short-term loans. You typically pay the loan off within one year, meaning it isn’t a looming burden in the back of your mind for years to come. Once you pay it off using the cash influx you expect to receive, you’re done with it.
- You can choose repayment options. As the borrower, you get to decide if you want to pay off the loan before or after your long-term financing is secure. However, this might depend on the lender, so choose one that matches your preferences.
Cons
- They’re difficult to obtain. These loans are more difficult to secure from your average bank. Additionally, you’ll need exceptional credit and equity, and a low debt-to-income ratio. Because of the precarious nature of bridge loans, lenders are especially strict about giving them out.
- They’re pricey. Bridge loans have both higher interest and transaction rates. If you don’t pay them off in a timely manner, you’ll rack up interest quickly.
- They’re risky. When you take out a bridge loan, you’re counting on an influx of money to help you repay it quickly. If one transaction falls through and you can’t pay back the loan, you’ll land yourself in hot financial water.
Bridge loans can feel like lifesavers to many business owners. However, making any decisions, you’ll want to consider the pros and cons.
Is a bridge loan right for you?
There’s much to consider before deciding whether to secure a bridge loan. First, you’ll typically have to have great credit, a low debt-to-income ratio and equity of at least 20%.
If you are approved by multiple lenders, you should review the terms of each before choosing one. Look out for prepayment penalties and hidden fees; and consider the payoff time offered by your potential lenders. Some allow more wiggle room while others demand immediate payment. For instance, you might be required to make monthly payments, or to pay up-front or back-end lump sum interest payments.
You’ll also want to consider the risks at every angle. If your plan of refinancing is not secure or has the potential to fall through, you might want to look into more traditional loans, like personal or SBA loans.
Ultimately, only you know what’s right for your business and what level of risk you’re comfortable assuming. If you think a bridge loan is right for you, research lenders in your area and prepare to apply for a loan.
CO— does not review or recommend products or services. For more information on choosing the best loan and financing options, visit our friends at business.com.
CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.
CO—is committed to helping you start, run and grow your small business. Learn more about the benefits of small business membership in the U.S. Chamber of Commerce, here.
