Finding the right bridge financing solution at the right time can help you take on more clients and give you piece of mind. Bridge financing is often misunderstood or misused by uneducated borrowers. Keep on reading to find out how bridge loans work before you apply, and the pros and cons of the product.
The Pros of Bridge Financing
It is a quick way to get financing
The application, approval, and funding process for bridge loans is much fast than if you apply with a traditional loan. Due to this expedited process, your business can get financing quickly so that you can pay for inventory, meet payroll, purchase equipment and much more.
Bridge financing is vital if you need to complete a job or need to take on additional projects such as buying real estate or buying another business.
There is no need to relinquish control of your business
Most business owners who are waiting on cash to turn towards short-term financing through one of their equity partners. Bridge loans are a short-term financing on solution, so you do not have to turn to other partners. The great thing about this is that you can maintain as much control of your business as possible.
It will help you with long payment cycles
The second most common reason that a startup fails is cash flow problems. Even if you have a healthy business, you may still be susceptible to running out of money.
When a healthy business runs into a cash flow problem, it is often caused by long payment cycles. Depending on the kind of business you have, you might get paid at the beginning and end of a project. You will need money to complete the project and afford other business expenses.
You can use bridge financing to gain access to cash which will cover your upfront expenses while you wait for payment.
The Cons of Bridge Financing
Bridge loan terms range from 3 to 18 months. This means your monthly payments are larger than if you would opt for another financing product. If you have a lot of cash, then this is not going to be a big disadvantage. If you are late on your payments, penalties and interest can pile up.
Risky if payment falls through
If you are planning on using the money from the payment you are anticipating for a project and the payment falls through, you can be stuck with a large expense. You could find yourself with significant debt to income rations make it hard to run your business.
High interest rates
Bridge financing is meant to be a short-term loan, so your lender will charge a high interest rate on bridge loans. Lenders may also charge extra fees on bridge loans including origination fees, closing costs, and more.
The Bottom Line
Bridge financing is a simple concept but getting it is not easy. You will need to know when and how to use your bridge loan to get the most out of it. Consider this list of pros and cons of bridge loans and evaluate what your business needs so you make the right decision.