Is your business stuck in a cash crunch? Not enough liquid funds to create upgrades to your company? Then you may want to consider taking a bridge loan.
What Are Bridge Loans?
According to Investopedia, a bridge loan is a short-term loan used until a person or company secures permanent financing or removes an existing obligation. It allows you to meet current commitments by providing immediate funds. Bridge loans are characterized by being short term (lasting up to a year), having high interest rates, and are usually backed up with collateral.
How Does A Bridge Loan Work?
Bridge loans cover the gap between the time when financing is needed but not obtainable. They are used by both corporations and individuals and lenders can customize these loans for different circumstances.
Now, here’s a list of benefits of taking a bridge loan.
Benefits Of Bridge Loans
You can take out a bridge loan in a jiffy. In fact, it’s possible to access funds from a bridge loan within a matter of days. With other types of loans, it will take at least several weeks to process it and have it disbursed.
Can Be Used For Any Purpose
Traditional banks and lending institutions are quite strict about the intended purpose of a loan. If they deem your loan application as not necessary, it will be rejected. On the other hand, bridge loans can be used for any reason or purpose. The only thing you need to do is prove that you can pay the loan back.
Flexibility In Repayment
Bridge loan lenders are more flexible and offer a more relaxed duration of loan and interest payments.
Less Constrained Lending Criteria
A large chunk of bridging loans are secured against assets you own, meaning, you would have to put up collateral of some sort. So, the other criteria ( like income, credit score, and financial situation )doesn’t really matter.
Bridge Loan For Businesses
A business may look for a bridging loan when they are waiting for longer term financing and are currently in need of cash flow. Take an example. If a business is looking for venture capital or equity financing and it’s expected to happen in 8 months, then in the meantime it will need capital to cover payroll, rent, utilities, etc.
Types Of Bridging Loans
Closed Bridging Loans
A closed bridging loan is available for a pre-fixed time frame. This type of bridging loan is more likely to be accepted by lenders because it gives them a greater degree of assurance about the loan repayment. It also draws in lower interest rates than an open bridging loan.
Open Bridging Loans
The repayment method for an open bridge loan is undecided at the initial inquiry and the payoff date isn’t fixed. In an endeavour to ensure the security of their funds, most bridge loan companies and institutions deduct the loan interest from the loan advance. An open bridging loan is preferred by borrowers who are not sure about when their expected finance will be available. Because of the unpredictability of loan repayment, lenders charge a higher interest rate for this type of bridging loan.
A bridge loan can be a fantastic way to bridge the gap between funds you need at the moment and equity capital you’re waiting for in the future. Hopefully, this article has helped you learn more about bridge loans, how they work and it’s benefits.