What Is Bridge Financing?
Bridge financing, otherwise known as bridge funding is a temporary loan that is intended to cover the short term expenses of business until the business secures long-term financing.
How Bridge Financing Works?
In the event where a business owner needs to access funds quickly to run operations, she may opt for a bridge loan. However, it's critical for business owners or entrepreneurs to understand the basics of bridge financing. As the name implies, bridge financing acts as a bridge or bridges the gap between funding options. This enables a business owner to have access to funds during a period of lows while the business tries to work to secure a permanent form of financing. Banks and other financial intermediates often issue bridge loans. While the loan term depends on some factors, the length of a typical bridge loan is six to twelve months but can sometime last more than a couple of years. This gives the business owner ample time to find and secure a permanent financing solution. It's imperative for a business owner who wants to obtain a bridge loan to have a real asset to stand as collateral. Once that is in place, a business owner can quickly secure a bridge loan.
How Is Bridge Financing Useful for Small Businesses?
Businesses use bridge financing for different purposes with the most common being mortgage bridge loan and operating or working capital. For instance, if the mortgage loan on the office space of a company dues before such company secures a long term mortgage loan replacement, the company may need to apply for bridge finance to cover the current mortgage. With bridge financing, your business can quickly gain access to finance, pay for inventory and be able to stay on point on your payroll.
The Pros and Cons of Bridge Financing
Relatively fast financing process. With bridge financing, you business can easily gain access to finance, pay for inventory and be able stay on point on your payroll, thanks to the expedited scheme.
Gain full control of business. Bridge financing enables business owners to gain control of the business. It’s common for business owners who are waiting on cash to turn towards short-term funding through one of their equity partners. However, part of the deal they often strike is a more significant stake in the business for their partner. With bridge financing, you don’t have to turn to partners for short-term funds. That way, you maintain as much control of your business as possible.
Option to navigation long payment cycles. Bridge financing helps business owners to handle upfront expenses while they are still waiting for payment, thereby maintaining the smooth running of business. Long-term payment cycle won’t be a problem with bridge financing.
While bridge financing provides benefits to businesses, it also comes with disadvantages.
Payments May Be Larger. Though bridge finance will come to the rescue when your business needs funding, you would make more substantial payment than you would with other financial schemes as a typical bridge loan is usually in the range of three to eighteen months. Besides, should you fail to make payment, you are at high risk of hitting piled up penalties and interest.
Can Be Risky if Future Payment Falls Through. Bridge finance can be risky if future payments fall through. Sometimes, you might be expecting future payments to continue with your present business operation, but if the payment falls through, you could be stuck with an unbearably colossal expense.
The Bottom Line
Though the basics of bridge financing aren't complicated, it doesn't mean that you can get a bridge loan easily. Understanding when and how to apply the loan is just as crucial as the details of the loan. Before you conclude with bridge financing, make sure you take the above-discussed advantages and disadvantages into account.