How to Get a Bridge Loan for Your Business
Business owners take out bridge financing to manage temporary gaps in company cash flows. The fund can be used for a variety of reasons, including inventory purchases and merger and acquisition (M&A) activity. However, many entrepreneurs are unsure about what bridge funding is, whether it’s right for their situation, and how to get a bridge loan for their organization.
Read on to find out what bridge loans are, how companies use them, whether you qualify for bridge funding, and how to apply.
What Is a Bridge Loan?
Bridge loans — sometimes called hard money loans or swing loans — are a type of short-term financing intended to bridge a gap in funding. They can be very useful if you have a need for capital now and expect to receive sufficient funds in the near future to cover your short-term cash deficit.
There is one main difference between how a bridge loan works and how long-term financing and traditional loans work. Standard monthly business loan, personal loan, or traditional mortgage payments include both the capital (what you borrowed) and the interest, but with bridge loans you make monthly interest-only payments and pay off the principal at the end of the term in one lump sum.
There’s a good reason for this.
Many, but not all, bridge loans are taken out to fund projects or activities that can take a year or more to complete. By repaying only the interest every month, the borrower has more capital available to complete the project, making it more likely they’ll be able to repay the loan in full at the end.
How Can My Business Use Bridge Funding?
Business owners use bridge lending to plug temporary shortfalls in their company’s cash flow or to take advantage of transient business opportunities. Common use cases for this type of loan include:
New businesses seeking capital to pay for startup costs before they start selling their products and services
Purchasing inventory to cover busy periods like the holiday season or to be able to supply large one-off orders
Funding everyday expenses like payroll and rent while waiting for clients to settle their outstanding invoices
Installing new equipment and machinery to increase operating capacity
Funding expenses related to initial public offerings (IPOs)
Buying other companies as part of an M&A drive where the loan is repaid by revenues generated by the acquired company or when they secure long-term financing
Allowing investment managers to take advantage of market opportunities before they collect money from their clients
Meeting costs associated with renovations or upgrades to existing business real estate so that they are compatible with lender requirements for commercial mortgages
Quickly purchasing commercial properties in competitive real estate markets
Improving properties to meet lender requirements for long-term financing
Bankrolling property development projects by freeing up cash from existing ongoing projects
Enabling property developers to purchase investment property at auctions
Step by Step: How to Get a Bridge Loan for Your Business
To obtain a bridge loan for your business, follow these six steps.
1. Determine How Much You Need
Work out how much your business needs to plug the gap in funding.
You’ll also need to calculate how much you’ll be able to afford in monthly payments and when you’ll be able to repay the loan in full. Factor in all expenses — including rent, payroll, and credit card bills — when assessing your capacity to make repayments.
2. Research and Compare Lenders
Once you know how much you need and how long you need it for, start searching for potential lenders.
There are several types of financial institutions you can approach for bridge funding, including:
Banks and credit unions: Many traditional lenders provide a range of bridging loan solutions for businesses. You may have a better chance of being accepted if you have a checking account with a particular lender.
Specialist bridging lenders: Individuals and groups of investors often offer short-term loans, like bridge loans, to businesses. You may be more likely to have your offer accepted by these lenders if you have a poor credit rating, but expect to pay high interest rates.
Brokers: Brokers are intermediaries that link you to the lenders most likely to approve their bridging loan applications based on your financial situation, the specific requirements of the loan you want, and lenders’ criteria.
3. Check Eligibility Criteria
Bridge loan requirements vary from lender to lender. Check each financial institution to determine whether they’re a good match. Some of the criteria you’ll want to look at include the following.
Maximum Funds Available
Lenders will have a maximum amount of funding that they’re willing to advance.
Before you apply, check that the lenders and brokers you’ve identified can provide you with the level of capital you’re seeking.
Right Type and Level of Collateral
Collateral can be either business or personal assets you offer to a bridge loan provider as a condition of your application being accepted.
The types of collateral lenders accept varies, but commonly accepted assets include:
Commercial real estate
Residential real estate
Accounts receivables
Investments
Business equipment
Cash in savings accounts
Inventory
Make sure the lenders you approach accept the type of collateral you’re prepared to offer. Keep in mind too that lenders only advance a maximum percentage of the assets you’re offering as collateral. To obtain the amount of capital you want, you may have to offer collateral that’s worth significantly more than the loan amount.
If you default on your loan or are unable to fulfill the exit strategy on time, your lender can seize these assets from you. They then sell them off to raise cash to cover the outstanding balance on your facility.
Business Income
Lenders will examine your company's financial health to work out how likely they think it is that you’ll be able to repay the loan.
They’re primarily concerned about your business’s ability to generate revenue. Many lenders are comfortable with a debt-to-income ratio (DTI) of up to 50% although this will depend on the lender.
Creditworthiness
Borrowers with lower credit scores are much more likely to be approved by choosing this loan option than others. Bridge loan lenders place a much greater emphasis on the value and liquidity of the collateral you’ve offered than your credit history.
Some lenders will also consider your company's debt-service coverage ratio when determining your ability to successfully manage debt as well as review both personal and business credit profiles.
4. Prepare and Submit a Business Plan With a Clearly Defined Exit
When you apply for a traditional bridge loan, you have to detail your “exit strategy.” This is your plan for repaying the loan in one lump sum at the end of the term. This will form part of the business plan you present to your lender with your loan application.
Your lender may also want to see financial documentation — like your cash flow statements, bank statements, and tax returns — to demonstrate your business's financial stability.
Example Exit Strategies
A retailer might take out a bridge loan to purchase and renovate a new branch location they’ve seen at auction. Their exit strategy would usually be when they’ve arranged longer-term financing on the premises, like a standard commercial mortgage.
Bridge loans are also used when one business buys another. Acquiring another company incurs significant costs, usually in the form of a down payment (“initial consideration”) for the business as well as legal and accounting fees. An exit strategy in this case might be to pay off the bridge loan with revenue streams from the acquired company, a fresh injection of investor capital, or both.
5. Review the Loan Terms You’re Offered
When your application is approved by a lender, they’ll send you documentation with information like the interest rates you’ll pay, your repayment schedule, and other fees you’ll be charged.
Some lenders are open to negotiation at this stage, so take this opportunity to persuade your lender to offer you more time to pay, a lower interest rate, or a reduction in the charges associated with your bridge loan.
6. Sign For the Loan and Receive Your Funding
Once you’re happy with the loan terms, sign the documentation, and make any upfront payments that are required to open the facility.
Your lender will then disburse the funds to your business checking account.
How to Use Bridge Loans Effectively in Your Business
To manage your cash flow and short-term funding needs better, the key to getting the optimal outcome with this financing option is to research the market first to find lenders willing to offer the loan amounts you want and who will accept the type of collateral you’re willing to offer.
Before you apply for a bridge loan and after you’ve been accepted, use the following strategies to minimize your risks of experiencing financial stress.
Shop Around for the Best Deal
One of the cons of bridge loans is the upfront and ongoing fees. Bridge lending is not cheap. You should expect to pay origination fees and legal fees when you apply, even if your application is rejected.
There may also be closing costs, notary fees, and appraisal charges you have to meet. If you use a broker, they’ll charge you separately for their service. This is on top of the much higher interest rates you’ll pay in comparison to longer-term sources of funding.
Although bridge loan monthly payments are low because you're only paying the cost of the interest, it's better to approach multiple lenders so you have a choice of loan offers to compare. The lower the interest rate and fees, the less expensive your bridge loan will be overall.
Prepare to Refinance
When you apply for your loan, you will have given your lender a date for your exit strategy. In other words, you won’t need the money after a given date, and you’ll be able to make repayment in full at that point.
Not every plan or project goes smoothly, and you may not be able to repay your lender in time. If you think that might be the case, start approaching other bridge lenders to ask them about refinancing your current facility. Existing lenders do roll over facilities, but it’s rare, so you should keep your options open.
Manage Your Cash Flow Carefully
Although the repayments you make on a monthly basis are interest-only, it’s important to include them in your cash flow management plans going forward.
Add the repayments you make to any existing cash flow forecast to ensure that you have enough to comfortably meet the repayments without affecting other areas of your business. If it looks like they may cause a problem, examine your current fixed and variable costs to look for opportunities to reduce your monthly expenditure until you’ve cleared your facility in full.
What Alternatives to Bridge Loans Are Available?
Bridge lenders are remarkably flexible. They consider a wide range of assets many other lenders wouldn’t touch, and they build a loan package specifically around your use case. They’re also more willing to consider businesses with lower credit scores if they have the collateral available.
But they are expensive. There are many upfront fees you have to meet before you know whether your application has even been accepted. Interest rate charges are higher and you’re under constant pressure to make sure you repay the loan before the due date.
In this article, we’ve explained how to get a bridge loan for your business, but there are other short-term finance options available from Backd. Unlike bridge loans, they don’t require you to find collateral, and you can be funded within 24 hours of application.
With Backd, you get two flexible financing options that can help you cover cash flow gaps:
Business lines of credit: Get up to $750,000 and withdraw funds only as you need them.
Working capital advances: Borrow up to $2 million with term lengths up to 16 months with flexible repayment options.
Apply now to unlock the capital your business needs.
