A bridge loan is a short-term business loan, or a medium-term loan that you can pay off early. It’s meant to tide you over until another source of capital is incoming, whether that’s a financial opportunity or a longer-term loan that’s taking some time to fund.
Because of their quick underwriting processes, time to funding, and repayment terms, business bridge loans are ideal for moments when you know you’ll have a source of capital incoming (and you’re sure you can pay off a smaller loan when that happens), but you need to seize an opportunity now. Here’s what you need to know about business bridge loans, and where you can start your search for bridge lenders.
What Is a Bridge Loan for Small Business?
A bridge loan is a short-term loan that does exactly what the name suggests—it bridges the gap in time for a transaction to close. (Alternatively, it might be a medium-term loan that amortizes, and which you can pay off early—more on that later.)
Technically, a bridge loan is a regular loan. The term “bridge” is just to denote that the loan is a short loan to tide you over between longer-term loans or another anticipated source of capital. Think of a bridge loan as a means to an end.
Often, people use bridge loans in real estate in between selling a home and buying a new one, but business owners can use bridge loans, too. According to Fundera sales and customer success manager Matthew Nicolosi, “A business could get a loan now to address an immediate need, like taking on a new project. They can use that short-term loan as a bridge until they refinance with a better loan product, like a multi-year bank term loan or SBA loan.”
Entrepreneurs can also take on business bridge loans when they’re waiting for approval on another loan product, such as a bank or SBA loan—it might take weeks to secure approval for these types of loans, but business owners may still need an infusion of cash to keep their operations running in the meantime.
How Do Small Business Bridge Loans Work?
Next, we’ll take you through the specifics of how small business bridge loans work to help you better understand if a bridge loan might be right for your company.
As you can guess, business bridge loans carry short repayment periods, potentially between three and 18 months. But like other short-term business loans, lenders consider bridge loans to be relatively risky. So, they may carry higher interest rates and a need for some kind of collateral to secure.
Rates and Fees
Whenever you’re considering taking on additional debt, make sure to read the fine print so you know exactly what you’re paying for. Check what loan fees you need to pay, in addition to the interest rate.
This is especially important if the loan is for a small amount of money, which is often the case with a bridge loan. If the fees are adding up to a large enough amount, they may end up making your loan too costly in the long run. In particular, pay attention to late fees on your payments, origination fees, and the possibility of a prepayment penalty.
It’s simply not worth it to apply for a business loan that you won’t be approved for, and business bridge loans are no different. Luckily, the criteria that lenders consider for a bridge loan are the same as for a short-term or medium-term loan (after all, they’re basically the same thing).
If you’re in a time crunch, you’re likely looking for a loan through an alternative lender, since these lenders are much faster to underwrite and deposit their loans than traditional lending institutions (like banks). Nicolosi says that alternative lenders mainly evaluate their short-term applicants based on credit score, sales, profitability, and time in business.
For the greatest chance of approval, you’ll likely need:
- $150,000+ annual revenue
- 600+ personal credit score
- 2+ years in business
But if you’re applying for a bridge loan from a bank, your evaluation standards will be much tougher, and the institution will need to see a few more credentials. Along with the borrower’s financials and credibility, Nicolosi says, they’ll also want to understand the circumstances around your loan request: Why is there a timing gap until you receive your funding source, and does that gap present a greater likelihood that you’ll default on your loan? Is there a chance that the second transaction won’t actually come through? Making your situation clear to your lender might increase your likelihood of approval.
Types of Bridge Loans for Small Business
Next, we’ll take you through the different types of bridge loans available to small businesses, so you can find the right match.
Short-Term Bridge Loans
A short-term loan is generally defined as a loan with a repayment period of no longer than eighteen months. Many short-term loans are repaid within one year. These loans are typically easier to secure than long-term loans, but often come with higher interest rates.
Here are some typical components of short-term bridge loans:
- Higher interest rates than conventional loans
- Lower credit requirements
- Shorter repayment periods
- Must be in business for six months or more and make a minimum of $50,000 annually
- Faster approval process
- Less paperwork to submit
- May require weekly or even daily repayments
Loan amounts can vary from $5,000 to $500,000 and some lenders will even accept a credit score as low as 500 for short-term bridge loans.
Business Lines of Credit
Another bridge loan option available to small businesses is a business line of credit or LOC. Like traditional business LOCs, you’ll be able to apply for a set amount of capital that you can draw on, as needed. You’ll only be required to pay interest (plus the principal) on the funds you use, making this similar to a business credit card.
What’s different about a business LOC is that you’re typically required to take out a higher amount than you would be when applying for a conventional loan or LOC. Many small businesses use this as a bridge loan by taking out a high amount and repaying according to the LOC repayment schedule.
Here are some typical components of bridge loan business lines of credit:
- Higher interest rates than conventional LOCs (starting around 7% to 25%)
- Repayment and interest are only required on the funds you use
- More flexible repayment schedules (repay immediately or over 3 to 18 months repayment period)
- Business LOCs can help your company build credit
- Many times, your business will need to be offered as collateral
Line of credit amounts can vary from $10,000 to over $1m and credit scores can be as low as 550 to qualify (depending on your lender).
Invoice financing — also known as accounts receivable financing — is another bridge loan option for small businesses. This type of financing can be used to secure financing for current cash flow problems if your company is anticipating a future payment. For instance, if you own a construction company and will be paid in full at the end of a job, you might need help financing expenses and payroll ahead of time. This is where invoice financing comes in handy.
Many lenders will accept an unpaid invoice or invoice agreement in exchange for an invoice financing bridge loan.
Here are some typical components of an invoice financing bridge loan:
- Access to immediate funds
- Might require small weekly payments until the repayment schedule kicks in
- Higher-risk option, since repayment depends on a future invoice being paid on-time
- Easy application process; less paperwork
- No collateral required
Invoicing loan amounts will vary depending on your specific needs. Typically, small business owners will be required to have a credit score of about 600 (though high 500s is possible) to qualify for this loan type.
Pros and Cons of Bridge Loans
Next, let’s review some of the key benefits and drawbacks of small business bridge loans.
- Immediate access to funds. According to Nicolosi, “the major benefits of a bridge loan are that you can begin a project or service immediately.” If you’ve found an awesome new storefront space or a chance to majorly upgrade your equipment, a bridge loan lets you do that now, instead of later when you have the cash upfront.
- Shorter repayment periods. Bridge loans are short-term loans and many of them are paid off within a year or less. This short repayment period is a key benefit because it allows you to pay down your debt quickly, rather than having it lingering in the back of your mind and growing interest over years or decades.
- No loss of business control. Many times, small businesses looking for short-term financing might turn to equity partners who will provide additional funding in return for a greater stake in the company. Bridge loans can help you get the funding you need without relinquishing more control of your company.
- Options and perks for early pay-off. The good news is that the size of your bridge loan is typically fairly small, so you might have the means to pay it off early—something that may not happen with a larger loan. Some lenders might even offer incentives for paying it off early. Just make sure your loan terms allow early-pay off and do not charge a prepayment penalty.
- Higher interest rates. Since bridge loans carry short repayment periods, they’re riskier for lenders to disburse. That may mean higher interest rates and larger collateral requirements, which may make the loan more trouble than it’s worth in the long run.
- Riskier Terms. Quite often when small business owners take out a bridge loan, they’re anticipating a large future payment or expecting a boost in revenue. Make sure you have a plan in place to repay your bridge loan before applying for one. In addition, some bridge loans, like lines of credit, may require putting your business up as collateral. The good news is, despite this higher risk, very few businesses have trouble repaying bridge loans on time.
The Bottom Line
So, is it worth it to take on a bridge loan? Business bridge loans can be exactly the tool your business needs to take on a big opportunity. And as long as you’re certain that your incoming source of capital is enough to repay that smaller loan—and keep your business up and running—then a business bridge loan might work for you.
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