Bridge Financing Explained
Maybe you've heard the term “bridge financing” before and don't quite understand the ins and outs of it, or maybe you're new to the term and are curious to learn a little more about how it relates to business.
In either case, if you're reading this article, you're probably interested in learning a little more about bridging loans. Today, we'll provide a basic overview of bridge financing, from what it is and how it works, to its advantages and disadvantages.
By the time you're finished reading this article, you'll hopefully have a much better understanding of bridge financing and how it can be used in business.
What is bridge financing?
Bridge financing – sometimes also called a bridging loan – is a type of short-term loan that helps to “bridge the gap” for a business while they wait for permanent financing to be secured.
A bridging loan is a temporary solution for securing funding as it will generally need to be paid back quickly (within a year or less, depending on the conditions of the loan).
Why might a business use a bridging loan?
A business might choose to use a bridging loan when they need access to funds quickly and are sure they'll be able to pay this loan back without delay. It can be used as a temporary solution while the company secures additional funding. This could be the period of time between a job being completed and a large invoice being paid or when purchasing new real estate for the company.
A bridging loan could also be beneficial if a company is offered a time-sensitive opportunity, but doesn't have the cash on hand to take advantage of it right away. In this case, a bridging loan could provide the necessary funds to seize the opportunity while the company secures additional funding.
Advantages of bridge financing
There can be several advantages to a company obtaining bridge financing:
- Typically fast approval means you can get the funds quickly.
- Can be a relatively simple process, as the loan is typically for a short amount of time and for a smaller amount of money.
- Access to funds that you may not have otherwise had, which can help you take advantage of opportunities or complete projects.
- Lots of uses including property purchase, additional cash liquidity for paying staff, or buying new equipment.
Disadvantages of bridge financing
Like any form of financing, bridging loans can come with their own risks and disadvantages:
- They typically come with higher interest rates than other types of loans.
- The loan amount can be limited.
- Often, collateral such as property or other assets will be required in order to secure the loan.
- If you're not able to repay the loan, you could put your business at risk.
- These loans will need to be paid back quickly (generally in 3 to 12 months, depending on the agreed-upon period of time).
Bridge financing can be a helpful tool for businesses, but it's important to weigh the advantages and disadvantages before deciding if it's the right choice for your company. We hope you've enjoyed learning a little more about bridging loans and the role they play for businesses.