Business Bridge Loans: Should You Get One?
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Bridge loans for businesses provide temporary funding while waiting for long-term capital. And while bridge loans are often used in residential and commercial real estate purchases, business owners can rely on commercial bridge loans for acquisition costs or to cover daily expenses during the time it takes to process more permanent financing.
Because bridge loans are short-term financing products, they often require fast repayment, sometimes over the course of a few weeks. Bridge loans could have high interest rates as well.
If you need fast financing to keep your doors open, or to take advantage of a new opportunity, keep reading to find out if a business bridge loan would be the right choice.
How does a bridge loan work?
A bridge loan can be used to cover a financial gap in your business. When securing long-term financing for purchases of equipment, supplies or property, there’s often a waiting period between getting approved and receiving your funds. To help you make ends meet in the meantime, you could obtain a short-term bridge loan.
Here’s a look at typical terms:
- Repayment terms between six months and one year, though terms could sometimes be as long as three years.
- High interest rates: 6% to 12%, or more.
- Potentially large loan amounts around $1 million or more; larger loans would have longer repayment terms.
- Upfront fees possible.
Bridge loans could be funded right away or within one week, giving you access to capital to pay for immediate expenses. In some cases, you may be able to choose whether you pay back the loan before or after your long-term financing comes through.
It could be difficult to obtain a bridge loan, as short repayment terms increase the risk for the lender. You may need strong credit and a low debt-to-income ratio to be approved.
Common uses for bridge loans
Commercial real estate bridge loans are common tools for business owners buying or renovating property. You could use a bridge loan to make a down payment on a building purchase or to finance a restoration.
When obtaining a bridge loan for real estate, the property acts as collateral on the loan. Approval would be based on the value of the property you own or plan to buy, rather than solely on your personal creditworthiness.
In addition to covering real estate expenses, bridge loans can be applied toward a variety of business costs.
- Construction bridge loans: Owners of construction businesses can use bridge loans to cover daily expenses, like payroll, while waiting for customers to pay for projects.
- Business acquisition bridge loans: You could use short-term acquisition financing to win an acquisition bid, buy out your business partner’s equity or expand your number of business locations.
Qualifying for a bridge loan
You could apply for bridge loans from banks, credit unions or alternative business lenders, although traditional financial institutions are less likely to issue short-term funding. The requirements for obtaining a bridge loan would depend on the individual lender, but you could expect to share details about your financial history and business assets.
Here are some common requirements:
- A minimum personal credit score or a certain debt-to-income ratio.
- An analysis of your debt service coverage ratio (DSCR). The DSCR could include any income earned through rent payments, property tax expenses, insurance costs, utilities, repairs and maintenance expenses.
- Self-financing: lenders typically cap commercial bridge loan amounts at 80% of property value for loans related to real estate — that means you’ll need to provide the remaining amount as your own equity.
You may need to demonstrate to a lender that you’d be able to fully cover loan payments, as well as your plans for financing after your bridge loan term ends. Borrowers are expected to either repay bridge loans in full, or to roll debt into a different financing program at the end of the term. The location, condition and existing liens on the building may affect the amount you could receive.
Who offers bridge loans?
As previously mentioned, bridge loan lenders include alternative business lenders, banks and credit unions. Here are a few financial institutions where you could apply for a bridge loan for your business.
The U.S. Small Business Administration partners with lenders across the country to offer Express Bridge loans to businesses in federally declared disaster areas. The bridge loans are part of a pilot SBA program that ends in September 2020, although it could be extended or made part of the SBA’s permanent offerings.
Express Bridge loans are available up to $25,000 and the SBA could guarantee up to 50% of the loan amount. The maximum term is seven years with a maximum interest rate of 6.5% over the prime rate. The prime rate was 4.75% as of Jan. 10, 2020. Loans can be used to support damaged businesses while long-term financing is processed.
National Funding is an online alternative lender that issues bridge loans to business owners who need funds to cover costs such as tax bills, expansion expenses or costs related to other loans, like loan origination fees. Business owners in an assortment of industries, including agriculture, baking, construction, farming, retail and trucking, could apply for a bridge loan from National Funding.
Loans from National Funding are available between $5,000 and $500,000, and funds could be disbursed in as few as 24 hours. Interest rates could be between 17.00% and 38.00%, with borrowers typically owing an origination fee of up to 2.50% of the total loan amount.
Fora Financial is another online lender that offers bridge financing to small business owners. Borrowers could use bridge financing to buy inventory, meet payroll, upgrade tech tools, repair equipment, bid on future projects or as emergency cash.
Loans from Fora Financial range from $5,000 to $500,000 with repayment terms between 4 and 16 months. Funds could be deposited in your account in as few as 72 hours after approval.
Like National Funding, Fora Financial‘s interest rates may be high. However, Fora Financial uses factor rates to express interest, which are written as decimal figures rather than percentages. You would multiply the factor rate by your loan amount to determine the total cost. Fora Financial’s factor rates were not disclosed as of publication.
Be sure to shop around to find a bridge loan with rates you can afford and repayment terms you can keep up with. If you find a lender you feel comfortable working with, you could quickly obtain a bridge loan to cover your urgent funding needs.