How does a bridge loan work?

A bridge loan works for businesses that are seeking very fast funding, financing that would serve their business needs as a temporary short-term funding solution. Bridge loan name came from financing phase “bridge the gap”. A bridge loan is a short-term option that is used before securing permanent financing. This type of financing is an ideal financing source due to being extremely flexible and offers a very high approval rate. 

This type of financing offers business owners with a good amount of time to find long-term financing. The term ranges anywhere from 3-18 months, similar as business term loan. You can obtain fast funding of up to $150,000 without any financials and up to $500,000 with financials. The repayment structure could be tailored on daily, weekly or monthly basis. The qualification process is extremely fast and simple. Applicants just have to provide 3 months of most recent bank statements with a signed credit application. With a very high approval rate, almost any business can qualify even with poor or low credit score, cash flow or revenue.   

How can a bridge loan help my business? 

A bridge loan can help your business obtain working capital quickly. This type of financing is really meant for businesses that have a short-term outlook. It’s used to cover expenses while they seek out more solid and secure type of financing such as business line of credit, equipment financing, business term loan or invoice financing. This type of financing could help you cover unexpected expenses such as paying large utility bills, business purchase, partner buyout, credit card debt, payroll, vendor bills, rent, taxes or other business expenditures.

Many businesses secure bridge financing to purchase real estate and use the capital for down payment or renovations. It works perfectly for real estate or renovations since it increases the equity significantly which helps borrowers secure better terms in the near future.  

Additional bridge loan benefits  

Besides covering unexcepted bills, you have an opportunity to develop a relationship with your lender and create payment history. Positive payment history could help you secure permanent financing in the future along with better terms. Business owners that do not qualify for traditional financing tap into a bridge loan to build up their credibility with the lender.     

This type of financing could be extremely helpful to businesses that experience volatile or seasonal revenue months. Many business owners use a bridge loan to stack up on inventory. It’s a perfect way to buy inventory in bulk and use the capital to secure discounts. Many business owners do not have a lot of inventory on hand especially during the holiday seasons. This financing is an ideal source to meet any demand.   

Business owners also use bridge financing to purchase another business or buyout their existing partner. It’s very difficult to obtain financing for this type of use since it offers a lot of risk to a lender. With a bridge loan, you can use the funds for any business purpose.    

How difficult is it to secure bridge financing? 

It’s not difficult to secure a bridge loan. At Creditfy, we serve businesses with both strong and poor credit score with flexible qualification requirements. Obtaining a bridge loan is a very fast and easy process. You can obtain funding within the same day. In order to qualify, your business would need to be established for more than 3 months. When it comes to credit, have a minimum credit score of 500. This type of financing is very encouraging for businesses that are new. Also for businesses that don’t have any track record with business financing. 

What are the rates on this type of financing? 

A bridge loan is the type of financing that is very easy and fast to obtain. Being so fast and easy comes with a price of higher interest rates than other traditional financing options. The rates are very subjective since each business is very different in nature. There is a lot of variance of positive and negative traits between each one. Rates could be anywhere from 15-30% depending on the businesses credit and business factors.

Can you obtain financing with poor credit? 

For example, if you have poor credit score you can still obtain financing but on a shorter term with higher rates versus someone with strong credit. Another example, if your business has been established for 1-year versus 3-years you will have higher interest rate as well. No wonder so many small businesses call this a “starter loan” or “starter financing”. 

Business operators often make a very difficult decision between the negative effects of not paying payroll, rent or vendors versus the high cost of capital associated with financing. Business owners need to carefully weight each option and understand the risks associated with each one. If you cannot pay for the loan, you can always negotiate with the lender to modify your debt payments. It’s very difficult to negotiate with your employees who depend on their check to work for free or get paid in the near future. 

Sometimes the high cost of capital is worth the price during short-term period, at the end it’s just a loan to help your business get through a gap of negative working capital. Another factor to consider is that the interest on the loan could help you avoid taxes. The interest on the loan could be written off against your income. Many business owners agree that even though the rates are high, it serves as the last option or a short-term fix. 

Would I require collateral for a bridge loan? 

Collateral is required when purchasing real estate or renovating your property but when the funds are for a business, collateral is not required by majority of the lenders. Typically, lenders do not require any collateral which makes this type of financing easy to obtain. 

Conclusion

A bridge loan is an important source of financing. If you cannot secure long-term financing, this could be a short-term solution to secure working capital for your business. After securing this type of financing, business owners could concentrate in obtaining permanent financing. 

At Creditfy, we believe that businesses succeed when they have access to fast funding. Fast funding does not exist with traditional lenders, at our company we use technology that enables us to provide fast financing. Complete our credit application and receive an approval within hours.