Are Bridge Loans a Good Option for Small Businesses?
There are many different types of financing available for small business owners. As you may expect, they all come with pros and cons. Some provide a large amount of capital but have strict credit score requirements. Others are designed to be used as emergency funding. One type of alternative financing to think about is bridge loans. Before you decide whether they’re right for your business, you need to understand how they work.
What Are Bridge Loans?
A bridge loan is designed as temporary financing. This kind of loan acts as a “bridge” between other loan options. In other words, owners may use a bridge loan to get short-term capital while waiting for a long-term loan to get approved. Why is this important for small businesses?
For one thing, working capital is essential for driving profits and growth. An SBA loan can be an excellent way to secure financing for expansion, providing great terms and low-interest rates. However, SBA loans have a small drawback: time. It can take anywhere from weeks to months to meet the qualifications and get approved for this type of financing. What if you have an urgent cash flow need in the meantime? That’s where bridge loans really shine.
What Can You Use a Bridge Loan For?
Bridge financing is a unique kind of short-term loan. It works by using a valuable asset as collateral. Here are a few ways a small business can take advantage of the capital:
- To purchase real estate
- To cover the down payment on equipment or vehicles
- To launch new products
- To finance inventory purchases
- To create a business website
- To develop or expand your company in smaller ways
- To pay taxes or take care of emergency needs
For example, if you’re looking for a new building, you may need capital for closing costs while you’re still waiting to get approved for a conventional commercial mortgage. Bridge loans can help you close the deal. Many companies, large and small, use bridge financing on a short-term basis to cover expenses while waiting for customers to pay.
What Are the Pros and Cons of Bridge Financing?
These loans have higher interest rates than long-term financing, but they’re also faster and easier to qualify for. Terms are usually short, providing around six months to a year for repayment. The idea is that by the time this period comes to an end, you should have long-term financing ready to go.
Is this option right for your small business? That depends on your current needs and the amount of liquid capital you have available. When used correctly, bridge loans can be an awesome tool for driving growth.