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How Does a Bridge Loan Work?

How Does a Bridge Loan Work?

Between stocking inventory, processing payroll, and paying debts, the cost of running a business can be more than what you prepared for.

At a certain point, you may find yourself looking for financing options to either keep your business off the ground or to fuel your growth—funding new machinery, expanding your location, or hiring more employees. Whatever your case is, a bridge loan for business is an option you should consider.

What is a Bridge Loan?

 

You probably hear about bridge loans as a type of short-term loan that finances the purchase of a new property while waiting for an existing property to sell. But, they can help homeowners as much as small businesses to finance an immediate need. They are usually easier to secure than traditional bank loans, but often at higher interest rates.

A bridge loan is particularly useful in situations like when you have to:

In essence, a bridge loan ‘bridges’ the gap between an immediate need for cash and a more permanent source of funding, whether that be a long-term loan or an income from sales. While its uses are diverse, a bridge loan is often reserved to address a short-term cash flow problem that may influence the success of a business.

How to Apply for a Bridge Loan

 

Bridge loans can be quite risky—they are generally not regulated like traditional mortgages and interest rates can range anywhere from 8-12%. Whether a bridge loan is worth the risk can be determined by referring to your financial modeling and analysis. Will the potential profit outweigh the costs of interests? Either way, a bridge loan could just be your only option for fast and convenient access to funds.

Loan Amount

 

Banks and private lenders offer commercial bridge loans, the amount of which are usually 70-80% of the total value of the investment you are purchasing. When you are applying for a bridge loan, you may be required to put up assets, either a real estate property or investment as collateral.

Fees

 

The lender will charge interest rates based on the amount you borrowed, your credit score, repayment period, and the perceived risks the lender is taking on by offering the loan. They may also charge arrangement, valuation, and other administrative fees.

Repayment

 

A bridge loan is designed to be a short-term form of financing, thus payment terms are usually on the shorter side—anywhere between a few months and a year. Some lenders offer loans that you can repay for up to 18 months.

Is A Bridge Loan for You?

 

The primary advantage of a bridge loan is that it can be arranged quickly. It has a faster application, approval, and funding process than most traditional loans. But, in exchange for that convenience is the high-interest rates and additional fees.

Many businesses are willing to pay these rates to tide over and because they plan to pay it off with low-interest, long-term financing immediately. Some lenders offer some sort of incentive if you pay off the loan early. So, if you think a bridge loan can help you meet your immediate financing needs, make sure to shop for a lender that can provide you with the best interest rates, payment terms, and loan amount.

What do you think of bridge loans? Would you apply for one? Share your thoughts by leaving a comment below!

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