How to Use Bridge Loans for Small Businesses

Posted at 14:05h in Small Business Financing by Kelly Hillock

A commercial bridge loan is a short-term financial solution for small businesses, offering a quick bridge over immediate financial gaps while awaiting long-term funding. This type of loan is favored due to its rapid funding speed, which is essential for businesses that need urgent capital. Additionally, bridge loans provide flexibility in terms of use, allowing businesses to address various financial needs without restrictions. They also offer shorter payback periods, making them a practical choice for businesses not seeking long-term debt commitments.

How does a Bridge Loan for a Small Business Work?

Lenders assessing a small business for a bridge loan consider various factors beyond the standard credit score and business revenue, with collateral being the most important requirement. The loan amount is often determined using the Loan-To-Value (LTV) or Loan-To-Cost (LTC) ratios. LTV ratio measures the loan amount against the market value of the collateral, while LTC refers to the loan amount as a percentage of the total cost of a project or purchase.

Lenders typically offer bridge loans ranging from 65% to 80% of the collateral’s value or the project’s total cost. For instance, if a business seeks a loan for a project costing $100,000 and the lender offers 70% LTC, the loan amount would be $70,000. Similarly, for an LTV example, if the collateral property is valued at $150,000 and the lender offers a loan at 75% LTV, the loan amount would be $112,500. These calculations help determine the maximum loan amount a business can receive, balancing the lender’s risk while providing necessary funds to the business.

Who Offers Business Bridge Loans?

Commercial bridge loans are typically available from three main sources: banks, direct lenders, and specialized online lenders. While options are fewer than other small business loans, these sources cater to varying needs, offering unique benefits and terms tailored to bridging short-term financial gaps.

Banks and Credit Unions

Businesses typically approach banks and credit unions for a commercial bridge loan, where a pre-existing relationship can be beneficial. The application process involves presenting detailed financial records and a solid business plan, with criteria including a good credit score, steady business revenue, and sufficient collateral. The timeline for funding can vary, often taking a few weeks to months.

Pros:

Lower interest rates compared to alternative sources.

The existing relationship adds a level of trust and familiarity.

Cons:

The application process can be lengthy and complex.
Stringent criteria may limit accessibility for some businesses.

Online Lenders and Loan Aggregators

Loan aggregators partner with various alternative lending institutions to provide a range of bridge loans for businesses. Loan aggregators help reduce time spent researching online lenders, but online lenders can also be applied for directly. They streamline the application process, allowing businesses to access multiple loan offers through a single platform. The qualification criteria typically include credit score, business revenue, and sometimes, a less stringent requirement for collateral compared to traditional banks. The loan approval and disbursement timeline is usually quicker, often within days.

Pros:

Faster application and funding process.
Access to multiple lenders and offers.

Cons:

Potentially higher interest rates.

Direct Lenders

Direct lenders offer bridge loans directly to businesses without intermediary brokers. This direct lending approach simplifies the application process, as businesses deal directly with the lender. Qualification requirements typically include a detailed review of the business’s financial health, including credit score, revenue streams, and potential collateral. Direct lenders may offer more flexible terms tailored to specific business needs.

Pros:

Simplified, direct communication with the lender.
Potential for customized loan terms.

Cons:

You’re dealing with a single lender with limited options compared to a combination of brokers.
May require more substantial collateral or higher credit scores for approval.

Uses of Commercial Bridge Loans

Commercial bridge loans serve various needs: they facilitate business expansion, enable real estate investments, provide immediate working capital, and bridge delays in accounts receivable. These loans offer flexibility and timeliness for businesses facing immediate financial demands or seeking to leverage timely opportunities.

Bridge Loans for Business Expansion

Bridge loans are important in business expansion efforts, such as acquiring competitors, launching new product lines, or opening new branches. These loans provide the necessary capital for growth strategies, acting as a catalyst while more substantial funding is secured. Bridge loans offer an agile financing solution for businesses poised to capitalize on market opportunities or scale operations. They bridge the gap between opportunity and long-term investment, ensuring that businesses can move swiftly to implement expansion plans.

Bridge Loans for Real Estate Investments

Bridge loans offer a strategic solution for businesses investing in real estate, be it purchasing a new warehouse, a production unit, or refinancing an existing commercial property mortgage. These loans provide immediate financing, facilitating quick acquisition or refinancing, crucial in a competitive real estate market. Additionally, bridge loans are a viable alternative to traditional real estate loans for covering the construction costs of new projects or renovations. They enable businesses to advance their real estate investments without long-term financing delays.

Bridge Loans for Immediate Working Capital Needs

For businesses needing access to funds, bridge loans are ideal for covering immediate working capital requirements. They provide the necessary liquidity for hiring new staff, managing payroll, purchasing inventory, and handling other day-to-day operational expenses. This financing option allows businesses to maintain their operational momentum while strategically allocating their internal funds toward long-term, growth-oriented investments and projects.

Bridge Loans for Delays in Accounts Receivable

Bridge loans are a practical solution for businesses experiencing delays in accounts receivable. These loans provide short-term financing to cover expenses during periods when payments from customers or insurance claims are pending. Common scenarios include waiting for invoice payments or insurance reimbursements. Utilizing bridge loans in such situations helps maintain steady cash flow, ensuring that the business can continue its operations without disruption.