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A bridge loan is a short-term loan, with a term of a few weeks to 12 months. Bridge loans allow a small business owner to make a strategic acquisition, acquire property, or make some other useful purchase. Bridge loans are also called gap financing or a swing loan. Borrowing in this fashion can often be a valuable tool in increasing enterprise value. On the other hand, “bridging” the enterprise to a longer-term financing solution or an expected influx of cash.

Bridge Loans for Small Business

Bridge Loans for Small Business

No Stigma with Bridge Loans

There’s no stigma attached to seeking a bridge loan, nor should business owners feel unprepared if circumstances arise for a short-term cash need. Conditions often present themselves by way of an unexpected opportunity. For example, an attractive and outsized inventory buy, immediate availability of equipment critical to the business, a window on a purchase of property, or opportunity to acquire a line of business or even a competitor. In these instances, small business owners are wise to explore bridge financing as an alternative to tying up exiting working capital financing or dipping into cash reserves, in consummating a transaction that could ultimately help benefit the enterprise longer terms.

Where to Look for a Bridge Loan?

The first impulse for many small business owners is to seek short-term help from “friends and family,” or from personal resources. These alternatives may seem the simplest, and therefore, “easiest” means of closing quickly on an immediate opportunity. Often these pathways prove suboptimal, practical considerations such as allowance for extensions in a term, or top-up needs for add-on financing to meet unbudgeted installation, legal, or onboarding costs. These present a strong case for seeking a solution more formally, through commercial finance companies that specialize in bridge lending. Dealing with a counterparty experienced in this type of lending often results in a more flexible structuring of the necessary financing, bringing it to bear at precisely the right time, and allowing for unexpected delays in retiring the facility.

Practical Considerations when choosing a Bridge Lender

Bridge Funding Speed to Close

Business opportunities typically cannot wait; neither can the lender. Seek out a financing source with a well-established bridge loan specialty. Find one with the means to satisfy the request along with the protocols and systems to deliver quickly. Terms should be readily and easily crafted, the adjudication process straightforward and transparent. Additionally, there should be an easy to understand, streamlined approval process.

Business owners should be wary of diligence periods, lasting weeks that lead to a decision process governed by a loan committee. Better to work with firms where the business owner is one or two steps away from the decision-maker; an individual or two that are empowered to commit the firm’s capital. Also who, at the same time, are willing and available to visit the business personally during the set-up phase. Speed to close goes beyond racing to a deadline but speaks to the reliability of the financing. There is often insufficient time to start over with another party should there be an unpleasant surprise in the granting of the loan.

Bridge Loan Fees and Expenses

Bridge loans generally appear “expensive,” compared to historically low rates available across the financing landscape for more traditional working capital, fixed capital, and real estate financing. Current rates in the range of 15- 24% (annual) are not uncommon. These rates are together with upfront fees of 2%. This also includes a similarly priced backend “success” fees upon payout and retirement of the facility. Rather than focus on the notional cost, business owners should instead consider the total expected cost over the projected life of the loan. They should also weigh this against the benefit of being able to close on the transaction. Obtaining the bridge loan makes the difference between “doing the deal and not doing the deal.”

Viewed in this fashion, the cost of financing over a few months often compares favorably to the longer-term gains attributable to realizing the underlying opportunity. Spending “x” to achieve “y” is the appropriate calculation. Weighing notional rates against market rates for garden-variety financing is not relevant.

Collateral needed for a Bridge Loan

Business owners should expect to be asked for a first lien on any unencumbered enterprise asset. Perhaps even a second lien on working capital and other fungible resources. Also, you may request a personal guarantee as a sign of the owner’s intention to work with the lender in good faith to repay the loan. The guarantee may, in some cases, be limited to the amount of the financing.

Repayment terms for a Bridge Loan

A noted, bridge loans are, by definition, facilities with repayment terms of a few weeks, up to 12 months. Business owners must identify, in advance, the source of repayment and timing. Firstly, the source of expected compensation has a considerable bearing on how a lender views the safety and soundness of the credit decision. For example, it is most likely that the lending company will give a favorable judgment to a business that appears to qualify for a straightforward SBA loan following the execution of the transaction. This is especially true when you compare it to a company that promotes a repayment plan tied to higher operating margins forecast to develop post-close.

In the case of the SBA candidate, the source of repayment, while not assured, is more a matter of timing. The business relying on profit improvements has a more difficult case to make, and evaluation will be accordingly. Given the cost of the bridge and the considerations surrounding collateral requirements, it’s in the business owner’s best interests to carefully consider the exit plan and to enter into this type of financing arrangement only when a source of repayment can be readily and safely identified.

Typical Term of a Bridge Loan

The term of any bridge loan should mirror the expected timing of repayment. The term of the facility has a bearing on pricing (the shorter the bridge, the lower the notional cost). Also, setting a reasonable term tied to an exit serves to focus attention on executing whatever is best-land necessary to effect payout. Circumstances can often conspire to create delays, and even the best-laid plans are vulnerable to change. This is perhaps the best argument when dealing with a recognized commercial finance company versus “family and friends.”

A commercial finance company typically has the resources to grant an extension — moreover, a general inclination to do so on commercially reasonable terms. The ability to seek accommodation of this sort is of great importance to any business owner. Such is true even in situations where timely repayment seems assured at the outset.

Bridge Loan Summary

Bridge financing is a valuable tool for any small business owner in executing on unexpected business opportunities. Seeking out and dealing with a commercial finance company that specializes in bridge loans represent a sound course of action. Successfully securing a bridge loan makes the difference between doing a deal or not. Owners should work just as hard on the repayment solution as closing on the opportunity itself. While rates and fees may appear prohibitive on the surface, weighing the actual cost of financing against the benefits of completing the underlying transaction will often show favorably. Having a lending counterparty that understands the potential need for a repayment related accommodation is a vital backstop consideration.

A common definition for a bridge is that it is a structure supporting a pathway over an obstacle. Bridge financing from, properly executed, can be a pathway to an unexpected opportunity for growth and continued business success.

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