As every business owner knows, a business requires capital. Whether you are starting a new business or growing a successful one, you have expenses to pay and investments to make. Equipment, inventory, supplies, and so on are all necessary. And they all cost something.
At some point, every business owner needs to consider borrowing money. A long-term business loan may or may not be an option based on your history and circumstance.
Small business loan lenders often approve applications based on the "three Cs." They are cash flow, credit score, and collateral. If a business falls short in any one of these areas, the bank may delay or deny the loan application.
In cases like these, then, a short-term loan is a better option. These shorter-term loans are bridge loans. Bridge loan lenders offer short-term financing to carry businesses through their immediate financial situations. Later on, the company may be able to move forward with a longer-term business loan.
Let's discuss the differences between a bridge loan and a business loan. You may find that a bridge loan is more beneficial than you think.
A Bridge Loan Is Short-Term
A bridge loan is a short-term loan. A business may use a bridge loan to "bridge the gap" between two long-term loans. Bridge loans are standard in real estate. Property owners need short-term financing to pay for one property until another property sells.
Any business that needs to cover capital shortfalls may choose a bridge loan. Bridge loans are often called working capital loans. Sometimes, a company has to repay an existing loan before it can apply for a new one.
Differences Between a Business Loan and a Bridge Loan
The term is, of course, the main difference between these two loan types. By design, bridge loans are short-term. Other differences are the waiting period, interest and fees, and repayment terms.
Business loans often have a longer waiting period. The banks spend more time checking your background and credit history.
A business may prefer a long-term business loan. But waiting for the loan to process can cost valuable time. The business may need funds immediately to maintain production. If so, a bridge loan may be the right choice.
Qualifying for the Loan
A company can qualify for a bridge loan more easily than a long-term business loan. Bridge loan lenders understand that the loans they provide are gap financing. Bridge loans are not long-term solutions. They can often customize the loan to fit the business's needs.
Bridge loan lenders have credit score minimums for bridge loans. But the guidelines aren't firm. Sometimes a debt-to-income ratio (DTI) comes into play. Though, a high credit score and low DTI aren't must-haves. This makes qualifying for a bridge loan easier and faster compared to a traditional business loan.
As we mentioned, businesses often opt for bridge loans as a short-term solution. They are usually waiting for a long-term business loan.
Bridge loan lenders may ask for future financing plans. Some may want to see the company's forecast for expected funds.
Or they may ask to see a payback plan. If the company has a solid history of repaying loans, they should bring that documentation with them. It can help bridge loan lenders make a favorable decision.
Interest and Origination Fees
One disadvantage of bridge loans is that they are a little more expensive than a regular secured business loan. Then again, a business may be more willing to pay more to get financing quickly.
Also, creditors assign more risk to bridge loans than they do to conventional, long-term business loans. The risk comes from the fact a business is seeking a short-term loan because a long-term financing isn't a viable option for the business.
The interest rates vary based on the factors I mentioned above. On average, bridge loan interest rates tend to fall about 2% above the average rate for long-term loans. Many businesses find the interest rates acceptable because the loan is short-term.
Bridge loan lenders do not apply a penalty for paying the bridge loan off early. A company can pay off a bridge loan early without paying an extra fee. This differs from most commercial loans. In most mortgage loans, for instance, the borrower pays a high penalty for paying the loan off early.
Because bridge loans are short-term solutions, companies benefit from paying them off early. Then they can apply for the long-term financing if needed. They can do that without incurring fees.
And they can do that without having to refinance the balance of the bridge loan into a long-term loan. This flexibility makes bridge loans a solid option.
Typically, the payback period for bridge loans ranges from three months to nine months.
Is a Bridge Loan Right for You?
If your business needs extra funds, a bridge loan may be for you. A short-term loan would let you move forward while something else is coming. That something else may be a conventional business loan, or it may be a successful sales season.
If credit history or something else is preventing you from going with a regular business loan, then a bridge loan may be your solution. Be sure to research the rate and fees, along with the terms set out by various bridge loan lenders.
There are bridge loan calculators available on the internet. You can use them to help you calculate your costs.
Looking for Bridge Loan Lenders?
At this point, you may have decided to look into a bridge loan over a conventional business loan, at least for now.
If you would like to learn more about working capital loans, bridge loans, or equipment loans, please contact us today.