Bridge financing is the word used for short-term loans that are in place temporarily until more permanent financing can be arranged. Bridge financing can be provided through any number of sources including senior lenders and subordinate lenders.
All bridge financing is considered temporary financing, typically lasting only a few months to a year at the most. Bridge financing is risky because it relies on the assumption your business will be able to secure permanent financing in the near future.
The number one reason why businesses seek bridge capital is to meet immediate financing needs. At times, a business may have expenses in the short-term that cannot be supported by company profits. This is certainly the case when a business is looking to expand and requires capital for expansion.
Also, a business profit slump or a seasonal business can benefit from temporary financing. Construction companies, for example, may need bridge financing during the slow winter months in order to keep their staff and equipment. Bridge financing is also often used when a business plans to take advantage of the opportunity to acquire another company. The bridge capital can be used to acquire the other company, and then permanent financing can be arranged to truly expand the operation.
Flexible Payment Options
Repaying a bridge financing loan is usually made easier through many different payment options. In some cases, the loan can be repaid only when permanent financing is arranged. This new loan can be used to completely pay off the existing loan. For businesses in the start-up phase, this provides the chance to make zero payments for an initial period of time. This option, however, can ultimately be more expensive because interest is still accumulating during the no payment period.
Other payment options may allow your business to pay off the loan in full before you sign another loan contract. The main advantage of this is the tremendous boost in credit this will provide your business. If you are starting a new business, this can be especially useful in order to give you an initial way to start your good credit report. Paying off this small loan first will make your next, larger loan less expensive. You will save a lot of money over the lifetime of your permanent financing with a lower interest rate.
Flexible Loan Options
Your loan contract for bridge financing can take many forms. For example, you can secure the financing through a private investor and offer equity bridge financing options for that investor. This means the investor will have a share of the success of your business, but it also means you will not have to pay off the loan in monthly payments with interest rates. Another option is to secure the bridge loan against a personal asset. When you are first starting a company, using your personal assets as collateral is a good way to get a loan, but you will not want to risk the asset long-term. Bridge financing gives you this option.