Short Term Commercial Bridge Loans | Small Business Loan Central

What Are Bridge Loans? Just as a bridge over a chasm helps a person go from one side to the other, that is the way bridge loans work in helping a company over a period where finances are low but the horizon is promising. Where there is any gap in financing, a company may consider a bridge loan to cover it. Bridge loans are meant to be short-term, are quickly completed if all requirements are met, and can keep a company from running out of funds.

Terms incorporated in a loan contract of this nature are usually harsher than conventional loans. The interest rates are going to be higher and the loan-to-value ratio will be more restrictive. Security may be required as well as significantly higher cash flow and good credit. The duration of the loan will be short, so be prepared to have some other option for the time when the loan will end.

Some Reasons a Company May Need a Bridge Loan

1. For a start-up company with the prospect of a venture capital firm investing a large sum of money in the company, a bridge loan may keep them operating until that investment actually happens.

2. Cash may be needed to pay bills until customers pay theirs.

3. Acquiring another company may mean the investing company needs to obtain long-term financing, but must have cash to close the deal that cannot wait for the long-term financing to clear.

4. A company interested in expanding may wish to issue bonds to cover the expenses of the expansion but may need immediate cash until the bonds can be marketed.

Investment Sources That Offer Bridge Loans Plus Pros and Cons of Each

The following are some specific places a business may be able to secure a bridge loan:

1.Banks

Pros

• Dealing with a local bank will build a healthy relationship and experience will help in any future financing needs.
• If the business has security for the bridge loan, the interest rates may be lower at a bank.
• If the business already has a loan with a bank, it may be possible to cross-collateralize the new bridge loan, using inventory or property that is already secured by a previous loan. Cons
• The business cash flow must be seen as higher than some other lending institutions require.
• Banks are sometimes slower in approving bridge loans.
• Not all banks offer bridge loans.
• The business must have a good credit record.

2. Equity Investors

Pros

• Someone the business owner knows personally may be willing to invest in the business. That will be a plus since the money may be available immediately.
• Working with an acquaintance allows them to see the operation of the business first-hand. This is a win-win situation.
• This opportunity gives the investor a better return on their money than the current market offers.

Cons

• If the business owner feels the investor will try to help run the business, the owner may not want to go with this option.
• If a difficulty arises with the business and the owner must default, that may ruin a relationship.