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As a small business owner, you’ve mastered the art of seeking opportunities and capitalizing on them. Maybe you’ve come across a piece of property that’s too good to give up, or struck a deal to boost your inventory for cheap—and finding a way to get the money quick is crucial. That’s when a business bridge loan might come in handy.
A bridge loan is a short-term business loan, or a medium-term loan that you can pay off early. It’s meant to tide you over until another source of capital is incoming, whether that’s a financial opportunity or a longer-term loan that’s taking some time to fund.
Because of their quick underwriting processes, time to funding, and repayment terms, business bridge loans are ideal for moments when you know you’ll have a source of capital incoming (and you’re sure you can pay off a smaller loan when that happens), but you need to seize an opportunity now—and soon isn’t soon enough. Sound good to you? Here’s what you need to know about business bridge loans, and where you can start your search for bridge lenders.
A bridge loan is a short-term loan that does exactly what the name suggests—it bridges the gap in time for a transaction to close. (Alternatively, it might be a medium-term loan that amortizes, and which you can pay off early—more on that later.)
Technically, a bridge loan is a regular loan. The term “bridge” is just to denote that the loan is a short loan to tide you over between longer-term loans or another anticipated source of capital. Think of a bridge loan as a means to an end.
Often, people use bridge loans in real estate in between selling a home and buying a new one, but business owners can use bridge loans, too. According to Fundera sales and customer success manager Matthew Nicolosi, “A business could get a loan now to address an immediate need, like taking on a new project. They can use that short-term loan as a bridge until they refinance with a better loan product, like a multi-year bank term loan or SBA loan.”
Entrepreneurs can also take on business bridge loans when they’re waiting for approval on another loan product, such as a bank or SBA loan—it might take weeks to secure approval for these types of loans, but business owners may still need an infusion of cash to keep their operations running in the meantime.
Here are a few additional criteria to consider about bridge loans:
As you can guess, business bridge loans carry short repayment periods, potentially between three and 18 months. But like other short-term business loans, lenders consider bridge loans to be relatively risky. So, they may carry higher interest rates and a need for some kind of collateral to secure.
Whenever you’re considering taking on additional debt, make sure to read the fine print so you know exactly what you’re paying for. Check what loan fees you need to pay, in addition to the interest rate.
This is especially important if the loan is for a small amount of money, which is often the case with a bridge loan. If the fees are adding up to a large enough amount, they may end up making your loan too costly in the long run. In particular, pay attention to late fees on your payments, origination fees, and the possibility of a prepayment penalty.
It’s simply not worth it to apply for a business loan that you won’t be approved for, and business bridge loans are no different. Luckily, the criteria that lenders consider for a bridge loan are the same as for a short-term or medium-term loan (after all, they’re basically the same thing).
If you’re in a time crunch, you’re likely looking for a loan through an alternative lender, since these lenders are much faster to underwrite and deposit their loans than traditional lending institutions (like banks). Nicolosi says that alternative lenders mainly evaluate their short-term applicants based on credit score, sales, profitability, and time in business.
For the greatest chance of approval, you’ll likely need:
But if you’re applying for a bridge loan from a bank, your evaluation standards will be much tougher, and the institution will need to see a few more credentials. Along with the borrower’s financials and credibility, Nicolosi says, they’ll also want to understand the circumstances around your loan request: Why is there a timing gap until you receive your funding source, and does that gap present a greater likelihood that you’ll default on your loan? Is there a chance that the second transaction won’t actually come through? Making your situation clear to your lender might increase your likelihood of approval.
According to Nicolosi, “the major benefits of a bridge loan are that you can begin a project or service immediately. The debt you’re taking on is only for a short period, which you’ll eventually pay off once the second transaction occurs.” Less debt is always preferable to more debt—so if you can limit both the size of the debt and how long you hold onto it, you’ll be better off in the long run.
Of course, the major benefit of a bridge loan is its speed. If you’ve found an awesome new storefront space or a chance to majorly upgrade your equipment, a bridge loan lets you do that now, instead of later when you have the cash upfront.
Nicolosi says that if he were looking for a bridge loan, “I would want to make sure that there is an early pay incentive, which’ll save me on interest once I can pay it off. Essentially, you want an amortizing loan, which incentivizes prepayment.”
The good news is that the size of your bridge loan is typically fairly small, so you might have the means to pay it off early—something that may not happen with a larger loan.
But if you’ll be penalized for paying off the full amount early, that may not be worth it. Even if the terms of your loan don’t specifically include a prepayment penalty, your bridge loan might not be fully amortizing. Put simply, if your loan isn’t amortizing, then you’ll be charged the full amount of interest regardless of when you pay off your loan—so even if you do pay early, you won’t be forgiven that extra interest. If you think prepayment is a possibility, check with your lender to make sure that’s an option.
Also, because bridge loans carry short repayment periods, they’re riskier for lenders to disburse. That may mean higher interest rates and larger collateral requirements, which may make the loan more trouble than it’s worth in the long run.
Probably, a bridge loan would be a short-term loan or a medium-term loan that you can pay off early without penalty (aka, an amortizing loan). And for the fastest-possible approval process—which is partly the point of a bridge loan, after all—you might want to begin your search with alternative lenders.
There are tons of short-term, online lenders out there. As a launching pad, look into National Funding and OnDeck. Both offer short-term financing, in loans amounts anywhere from $5,000 to $500,000, which make these good options for business bridge loans.
National Funding’s loan requirements are fairly straightforward: You need to have been in business for one year, make $100,000 in gross annual sales, and be able to provide three months’ worth of bank statements when you apply. Other than that, there’s no collateral or down payment needed, and once you’re approved you can enroll in automatic payments, making it easy to stay on top of your loan without too much thought.
You’ll find similar eligibility requirements for OnDeck. They too want you to have been in business for a year and make $100,000 in gross annual sales, but they also want to see a personal credit score of 500 or better. OnDeck also has a list of industries they can’t lend to, so check out that list before applying to see if you even have a shot at being accepted.
If you’re looking for a business bridge loan with a higher capital amount, a medium-term loan might better meet your needs.
In that case, consider a lender like Credibility Capital. They offer loans from $10,000 to $400,000, and tick a lot of the boxes you’re looking for in a business bridge loan—they offer one-, two-, and three-year term loans, all amortizing and paid monthly. They also do not have prepayment penalties, so if you find yourself able to pay off the whole loan early, you’ll be able to do so without being dinged with extra fees.
Credibility Capital looks for businesses that have been operating for 24 months instead of just one year, and although they don’t have an exact revenue requirement, they do want you to be generating a profit. They’re also looking for strong personal credit and an applicant who hasn’t declared personal or commercial bankruptcy in the past five years.
For an alternative, look into Fundation. This lender offers loans from $20,000 to $500,000, making them a good option for the slightly larger medium-term loan seeker.
Fundation funds loans for expansion, new equipment, and capital improvements—sounding familiar? If you’re looking to grow your business but just need a little extra help to get there, Fundation would be a good place to start. With no collateral requirements, no prepayment penalties, and up to four-year repayment options, they’re in it to help you get up and running, not bog you down with fees and penalties. They’re looking for borrowers who have been in business at least one year, have at least three employees, have good personal credit, and at least $100,000 in annual sales.
So, is it worth it to take on a bridge loan? As we mentioned (and you likely already know), less debt is preferable to more debt. If you can avoid taking on an additional loan, even if it is a small amount, it might be more beneficial in the long run to avoid a bridge loan.
That said, business bridge loans can be exactly the tool your business needs to take on a big opportunity. And as long as you’re certain that your incoming source of capital is enough to repay that smaller loan—and keep your business up and running—then a business bridge loan might work for you.