Published By Janet Gershen-Siegel at February 8th, 2021
Cash flow isn’t always guaranteed. Many businesses have uneven cash flow. That is, lean times and not so lean times. Startups still getting their bearings may take a while before they get enough regular clientele to get consistent profits coming in. Seasonal businesses will naturally make more during the appropriate season, and perhaps leading up to it, but less later.
Even with uneven cash flow, a business still has bills. No matter what’s happening with your cash flow, you still need to pay the bills. Seasonal businesses need to stock up to be ready once demand picks up. Startups need to get their inventory ramped up so they can meet demand when it comes and not lose out on opportunities. None of this is free.
Every entrepreneur wants to be filling in the gaps. One solution to such uneven financing is bridge loans. Also known as interim financing, gap financing, or swing loans. Bridge loans bridge the gap during times when you need financing but you can’t get it yet. Both corporations and individuals use bridge loans. Lenders can customize these loans for many different situations.
Business bridge loans are short-term loans. They are used until a person or company gets permanent financing or removes an existing obligation. It allows the user to meet current obligations by providing immediate cash flow. Business bridge loans are short term, up to one year. They have relatively high interest rates. And they are often backed by some form of collateral, like real estate or inventory. See investopedia.com/terms/b/bridgeloan.asp.
If a company is doing a round of equity financing, the round may be expected to close in six months. It may opt to use a bridge loan to provide working capital to cover its payroll, rent, utilities, inventory costs, and other expenses. This is to tide it over until the round of funding goes through.
Bridge loans are standard in real estate. If a buyer has a lag between the purchase of one property and the sale of another property, they may turn to a bridge loan. Property owners get short-term financing to pay for one property until another property sells. See expresscapital.com/resources/what-are-the-differences-between-a-business-loan-and-a-bridge-loan.
Companies may opt for bridge loans if they’ve gotten approval for a regular business loan but need interim funding until that loan comes in. Bridge loans can also come into play when a corporation is releasing an Initial Public Offering (IPO). Bridge financing, in investment banking terms, is financing used by companies before their IPO. It is meant to cover expenses from the IPO and is typically short term. Once the IPO is complete, cash raised from the offering immediately pays off the loan liability. See investopedia.com/terms/b/bridgefinancing.asp.
Business loans often have a longer waiting period. The banks spend more time checking your background and credit history. Bridge financing can happen a lot more quickly. Application, approval, and funding are all faster.
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, 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 guidelines tend to not be firm.
Sometimes a debt-to-income ratio (DTI) comes into play. But a high credit score and low DTI aren’t must-haves. Hence qualifying for a bridge loan is easier and faster versus a traditional 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 want a payback plan. If the company has a solid history of repaying loans, they should bring that documentation. It can help to get a favorable decision.
Bridge loans are a little more expensive than a regular secured business loan. But a business may be more willing to pay more to get financing quickly. Creditors assign more risk to bridge loans than to conventional, long-term business loans. This 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 but 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. You can pay off a bridge loan early without paying an extra fee. Contrast this with most commercial loans. In most mortgage loans, e.g., the borrower pays a high penalty for paying the loan off early.
Since bridge loans are short-term solutions, companies benefit from paying them off early. Then they can apply for the long-term financing if necessary, without incurring fees, and without having to refinance the balance of the bridge loan into a long-term loan.
Bridge loans are often a type of unsecured loan. Hence there’s no attachment between the loan and a business asset like equipment or business property. A secured loan is one where an asset is placed into the agreement (collateral). With a collateral-based loan, the lender can try to repossess (take legal ownership) of the collateral if you fail to repay the money.
Due to the unsecured structure of many business bridge loans, the business takes on less risk, and the lender takes on more. Hence the business can be on a more stable footing than with a secured loan. There is typically nothing besides the money for the lender to take back. But recognize that if a business is failing and needs money to pay back a bridge (or any other type of funding) loan, then you may end up selling business assets anyway.
Yet another difference is in the area of collateral. Business owners should expect to be asked for a first lien on any unencumbered enterprise asset. Perhaps even a second lien on working capital and other fungible resources. They may request a personal guarantee as a sign of the owner’s intention to work with the lender in good faith to repay the loan. The guarantee may, in some cases, be limited to the amount of the financing.
Bridge loans by definition have repayment terms of a few weeks, up to 12 months. Business owners must identify, in advance, the source of repayment and timing. The source of expected compensation affects how a lender views the soundness of the credit decision. For example, it is most likely that the lender will give a favorable judgment to a business that could qualify for a straightforward SBA loan after the execution of the transaction. In the case of the SBA candidate, the source of repayment, while not certain, is a matter of timing.
In contrast, a business relying on profit improvements has a harder case to make. The lender’s evaluation will change accordingly. Given the cost of the bridge and the considerations surrounding collateral requirements, it’s in the business owner’s best interests to carefully consider the exit plan. An entrepreneur should enter into this type of financing arrangement only when they can readily and safely identify a source of repayment. See businesscash.com/bridge-loans-for-small-business-advantages-and-practical-considerations-when-choosing-a-bridge-lender.
Businesses with outstanding receivables can turn to AR financing instead. you can regularly secure money against receivables in as little as 24 hours. With AR financing, you can get monthly rates between 1.25% and 5%, and you can get financing as high as $20,000,000. All of this is possible, even with severely challenged personal credit.
Bridge loans may have certain minimum FICO requirements. But an accounts receivable financing program is perfect for business owners who have credit issues. Lenders are not looking for, nor do they require good credit to qualify. You can even get approval and be advanced 90% of your receivables, even with low credit scores.
You can get approval with a personal credit score as low as 500, even if you have recent derogatory items and major collections on your credit report. Lenders truly do not care about your personal credit. They care more about the credit of the companies who you have the receivables with.
If a business has credit card sales, then a merchant cash advance can be a good alternative to a bridge loan. An MCA technically isn’t a loan. Rather, it is a cash advance based upon the credit card sales of a business. A small business can apply for an MCA and have an advance deposited into its account fairly quickly. So you can offer Net 30 terms, but not have to wait a month to get paid.
A merchant financing program is ideal for business owners who accept credit cards and are looking for fast and easy business financing. An MCA program is meant to help you get funding, based strictly on your cash flow as verifiable per your business banks statements. As a result, lenders in general will not have burdensome document requests.
Business revenue financing is for companies with incoming revenues proven by business bank accounts. Also known as royalty-based financing. Business revenue financing is a way to raise capital from investors who get a percentage of the enterprise’s ongoing gross revenues in exchange for their investments. In a revenue-based financing investment, investors get a regular share of business income until a predetermined amount is paid. Often, this amount is a multiple of the principal investment. It is usually between 3 – 5 times the original investment.
Get a line of credit for up to $150,000. This is no doc financing. Pay 0% for up to 18 months. Helps build business credit because your payments are on report. 680 or better FICO required. See my.creditsuite.com/qualifier-form.
This program is meant to help clients get funding strictly due to personal credit quality. Our lenders will not ask for financials, bank statements, business plans, resumes, or any of the other burdensome document requests that most conventional lenders demand.
Our lenders will review your credit report to ensure there are no derogatory items on the report. To get approval, you shouldn’t have any open collections, late payments, tax liens, judgments, or other types of derogatory items on your reports.
To qualify you should also have fewer than 5 inquiries on your credit report, within the last 6 months. You should have established credit. This includes open revolving accounts currently on your credit report, with balances below 40% of your limits.
Bridge loans are a means of covering gaps in financing due to various causes. They are faster to get than traditional business loans. But rates can be higher. And terms are a lot shorter. There can be minimum FICO score requirements.
For entrepreneurs with decent FICO scores, the Credit Suite hybrid credit line can be the perfect alternative to a bridge loan. And you build business credit at the same time! Let us show you how.