A bridge loan is a kind of short-term funding built to help a business meet its financial needs until it acquires a long-term loan.
These loans are a life-saver, especially when you need instant funding to keep operations running or seize an opportunity.
Entrepreneurs who apply for a bridge loan can use it to buy or upgrade assets or finance business operations. Then, as soon as their business acquires long-term funding, it utilizes the funds from the newly acquired long-term loan to settle the bridge.
Companies depend on bridge loans (most with higher interest rates than regular long-term funding) to satisfy their urgent financial needs.
Bridge loan: What Can You Use it for
You can use your bridge loan to fulfill business needs like:
- Buying office space
- Improving or upgrading your office
- Buying equipment
- Buy a foreclosed office
- Acquiring seasonal inventory
That’s not all. You can also use your loan to fund operations or take advantage of a sudden expansion opportunity.
How are Bridge Loans Different From Regular Business Loans?
A bridge loan differs from your traditional business loan in many ways. Below is a detailed comparison of the two.
- Its interest rates are higher: bridge loans have higher rates beginning from 8 to 10 percent.
- Short-term funding: Bridge loans have shorter terms (six months to a year) while regular business loans can go up to 10 years or longer. Some loans go as long as 20 years.
- Stricter underwriting: Since bridge loans are quick loans that pose a higher risk to the financer, they have a stricter underwriting process.
- Quicker application: These loans are approved and disbursed in a month or so. Regular loans can be a hassle, more so if your business has outstanding loans.
- You pay interest only: Traditional loan payments carry both principal and interest. Bridge loans only charge interest.
- Side collateral: Regular business loans are secured with the asset being bought or upgraded, while bridge loans accept any asset as collateral.
It’s crucial to understand these differences before using bridge loans. Do further research to learn more about them.
Final Words
Bridge loans are a stepping stone to keep your business afloat when in need of funding. Companies looking to take out this type of loan must compare lenders and read between the lines before committing to any deal.