Have you been considering using bridge loans for your business?
Essentially, a bridge loan is a short-term loan that is designed to provide temporary financing until other forms of financing can be obtained. In short, a bridge loan bridges the gap until more permanent forms of financing can assist in solving financial problems of business owners. While bridge loans are typically used to finance the purchase and/or renovations for real estate properties, many business owners use bridge loans to keep their business afloat.
Why Do Businesses Choose Bridge Loans?
As mentioned, many businesses use bridge loans as a way to obtain money while other forms of financing are secured. Many types of loans, like SBA loans(from the Small Business Administration), can pose have extensive waiting periods and restrictive guidelines that may not be a short-term option for cash-strapped business owners. Most business owners can’t really forecast when they will need money, especially when unexpected problems arise and they don’t have significant capital saved to address impending issues (i.e. a broken refrigerator). Therefore, bridge loans like MCAs (merchant cash advance loans) or interest-only loans (typically at a rate of 9% or higher) are good types of bridge loans.
Let’s take a look at the pros and cons using bridge loans for your business.
The Benefits of Bridge Loan Financing
Perhaps the best benefit of a bridge loan is that the financing it provides is short-term. While most other loans are geared towards long-term expenditures, like college tuition and mortgages, bridge loans are designed to be repaid in full by the time that long-term financing is finally secured. This contrasts long-term financing, which can rack up significant fees and interest payments–eventually creating some form of financial hardship that makes repaying the loan difficult and compound the borrower’s financial problems. In the worst case scenario, penalty fees may start to accumulate and the borrower ultimately struggles to secure more fundings to cover the mounting debt, which creates a vicious cycle. With bridge loans, this problem is circumvented entirely and gives business owners more options.
Another great benefit of bridge loans is that many lenders allow borrowers to choose their repayment options. In most cases, borrowers are able to choose to repay the bridge loan before the permanent financing is secured or afterwards.
- In the case of paying the loan back before securing long-term financing, the payments are typically structured to allow the borrower to repay the loan in full over a limited period of time. The advantage of this method is that if the borrower makes all of the payments on time, their credit rating will improve significantly. This has the benefit of helping them qualify for long-term loans that they may be ineligible for.
- By contrast, permanent funding that is later secured can be used to repay the bridge loan in full. Typically, this requires more risk on the part of the lender, so only those with good credit are able to use this method.
While bridge loan financing has its benefits, it suffers from several drawbacks that borrowers should be aware of before they take out a bridge loan.
The Cons of Bridge Loan Financing
Bridge loans are a type of double-edged sword, in that the biggest benefit of bridge loan financing also is its most substantial drawback. Because borrowers must repay the bridge loan quicker than they would a more long-term loan, payments will be more substantial. This may not be an issue if the borrower has enough cash to make all of the payments, but the borrower could get into more debt if they face other financial obstacles or have cashflow problems. And because of the short-term length of the bridge loan, lenders are usually less likely to be flexible when it comes to late payments. Ultimately, lenders may charge larger fees and penalties that makes it harder for the borrower to repay the bridge loan.
And as we saw in the benefits of bridge, if the borrower chooses to have the loan repaid once permanent financing is secured, there is a built-in drawback: For every month the loan is not repaid, it gathers interest–meaning that the actual payment wind up larger than what the borrower would have paid if they made regular payments during the loan’s actual term.
Furthermore, borrowers that that choose to pay bridge loans back when more permanent financing becomes available can be a bit of a gamble–especially when lenders are trying to determine whether a business owner will have the ability to pay back a long-term loan. If a lender runs into financial trouble of their own, borrows may have to scramble to find funding elsewhere by attempting to take out another long-term loan, but the debt will ultimately lower their credit rating, which makes it harder to secure more financing.
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As you can see, bridge loans can be a very useful way to secure funding for business owners, though it does have some drawbacks that require careful consideration.
At Evolution Capital Group, we can offer a short-term bridge advances to cover business owners during the waiting process for their more permanent financing. Because we understand each owner’s unique situation, we can get very aggressive with rates and terms–even incorporating a discount for qualified business owners if the loan pays off early. This provides the best solution for business owners, as they are able to do what they do best: run their business. Visit evocapitalgroup.com to begin exploring your bridge loan options today.