There are many options for financing a business. Unfortunately, they may not always be available at the right time. That’s where bridge loans come into play. In this post, we’re defining bridge financing, sharing the pros and cons of this type of funding, and helping you decide if it might be a good option for your business.
What is Bridge Financing?
Bridge loans aren’t a specific type of loan, but a category that can encompass many different types of loans. However, there are a few characteristics that these loans have in common.
- They are short term loans, with some providing funding for just a few months, ranging to several years.
- The loans provide funding quickly. Typically, the loans have a streamlined application and approval process to get funder to borrowers as quickly as possible.
- Bridge loans are usually given in modest amounts, rather than large amounts that are gained during a major round of fundraising.
The purpose of a bridge financing is to bridge the gap between those rounds of fundraising. They’re the smaller amount loans that can help top tide a business over while waiting for larger funding sources to fall into place.
Pros of Bridge Financing
There are many benefits to choosing a bridge loan as a form of interim financing when a business requires cash. The most obvious is that these loans can provide the funding that the company needs to keep operating between major influxes of cash. That money might be necessary for day to day expenses like paying employees or for one-time costs like renovating office space to make room for new employees as the company grows.
As a company grows, the need for more extensive funding will continue to grow as well. When fundraising rounds require greater amounts, they also tend to take longer to complete. Forbes estimates that a round of funding for a startup will take between six and nine months, with 12 to 18 months between rounds. While waiting months for that money to come through, bridge financing can be the quick solution to the need for cash.
Because bridge loans are generally short term and come in lower amounts, that usually means that they come with more flexible terms. That might mean that the loan can be paid back early without penalties.
Finally, a short term, low amount loan can help to boost a business’ credit score. By taking on a loan and making regular payments, a newer company can build their credit score and show their responsibility in paying back the loan on time. An improved score can help that company to secure larger loans and other forms of financing in the future.
Cons of Bridge Financing
When a company requires cash, any source of funding might seem like the best option or even the only option. However, it’s important to look at the potential drawbacks of bridge financing as well. Those drawbacks start with the cost of the loan. Bridge loans tend to be more expensive, with higher fees than other types of loans.
Bridge loans are meant to be a short term solution for a need for cash flow. For companies in need of a more long term solution for ongoing business costs, another type of loan or more consistent income might be more beneficial.
When looking at temporary financing solutions, it’s important to remember that they should be used as just that – a temporary solution. While a bridge loan can be extremely helpful for unexpected expenses and opportunities to grow a business, they should never be seen as a permanent solution to rely on for consistent funding needs.
Is Bridge Financing Right for Your Company?
Bridge loans are one more financing solution that a business owner can keep on their list of resources to tap into when needed. These short term loans can be a smart solution to an immediate cash flow need for those who are willing to potentially pay slightly more in interest and fees.
Take some time to compare all of your business funding options to choose the one that will work best for you and your company.
Checking for pre-approval will not affect your credit score.