What Is Bridge Funding & When Should You Use It?
Get over it.
That’s bridge funding explained in three words. But, for anyone asking “What is bridge funding”, clearly that isn’t going to cut it. What are you supposed to be “getting over” anyway?
Here we’ll delve into the topic of bridge financing and explain what it is, how it works, and why you should keep it in your ever-growing arsenal of business funding solutions.
Ready? Let’s go!
Bridge funding explained
Bridge funding (otherwise known as bridge financing, gap financing, interim financing, or swing loan financing) is a type of loan that acts as a temporary fix to help businesses cover their expenses until they can obtain a longer-term financing solution. Usually, bridge loans are secured by collateral in the form of real estate, other valuable assets, or a personal guarantee. Additionally, the loan terms for small business bridge financing normally start around 6 months.
Bridge financing is a useful tool for business owners to use when they anticipate that their funds will run dry in the near future while, at the same time, expecting a larger injection of capital not too long after that; small businesses can use bridge funding to “bridge” the financial gap between those two points.
You can avoid finding yourself in a struggle to climb out of a valley of debt with bridge funding. Use it as a financial fix that will help you stay in the black until a more permanent solution can be arranged.
What is bridge funding? You’ve got the answer.
Another question remains: What forms of financing qualify as bridge funding?
Generally speaking, bridge funding comes in three forms:
- Debt bridge financing
- Equity bridge financing
- IPO bridge financing
1. Debt bridge financing
The first type of bridge funding that small businesses may consider comes in the form of a bridge loan. Bridge loans are normally short-term and come with high interest rates (compared to other types of business loans). Business owners need to be careful when considering bridge loans since the interest rates can be very high (15-24% is not uncommon), which can lead to more financial issues as opposed to fixing them.
2. Equity bridge financing
If your small business needs to overcome a financial gap, you may want to avoid incurring debt. In that case, equity bridge financing provides a bridge funding solution that offers investors equity in your business (as opposed to offering lenders repayments with interest).
Of course, investors will determine whether or not to provide a given business with bridge financing based on the likelihood of that business becoming profitable. Owners should also be cautious about pursuing this route towards bridge funding, as they’ll be turning over a portion of control to outside investors who may want to make big changes to the company.
3. IPO bridge financing
Are you familiar with the IPO process? The process of “going public” with an Initial Public Offering (IPO) can take its toll on your business’s funds. For that reason, there’s a third type of bridge funding known as IPO bridge financing. As you may have already guessed, this form of bridge financing is meant to cover the costs involved in the IPO process.
Similarly to other bridge funding options, this is typically a short-term loan. IPO bridge financing is then paid off with the cash brought in from the shares sold.
When should you use bridge funding for your businesses?
The simple answer: use bridge funding when you need quick access to funds that you’re certain you can pay off quickly.
The detailed answer: given the fact that bridge loans come with short terms and higher interest rates than other business funding solutions, it’s in the interest of the borrower to repay the loan as soon as possible. Bridge financing, as pointed out above, is meant to bridge the gap between points of financial stability.
In other words, it’s a temporary fix by definition and is designed to be an effective tool for businesses that will be able to pay off the debt quickly. If your business doesn’t match that description and you decide to take bridge financing anyway, you might find yourself in a mountain of debt before you know what hit you.
Common situations where businesses may use bridge funding:
- Purchasing new real estate
- Renovating existing real estate
- Covering operating expenses during a short-term shortage of funds
- Acquiring a piece of equipment that’s on sale for a short time only
- In general: Taking advantage of time-sensitive opportunities that can benefit your business
What are the benefits of bridge loans?
When your business is in a tight financial position, you can use bridge funding to gain access to the capital that you need to get through a tough time. Among the biggest advantages that bridge financing has to offer is the speed of funding. If approved, you can expect to receive the funds from a bridge loan within a matter of hours to just a few days. Compare that to other types of funding, and you’ll realize that bridge loans are some of the fastest business loans out there.
Aside from the short wait time for borrowers, bridge funding options are short-term. That means you don’t need to worry about getting weighed down by committing to a loan that will take years to pay off. Plus, if you find yourself able to pay back a bridge loan earlier than expected, most of the time you won’t face any prepayment penalties. For most other types of small business funding solutions, that isn’t the case.
In a nutshell: It’s fast to get approved, fast to get funded, and you’re incentivized to pay it off quickly.
What are the risks of bridge loans?
First and foremost, the biggest risk involved in bridge funding is the high interest rates. Simply put, if you don’t pay back a bridge loan quickly, you’ll see the interest accumulate at a faster rate than you’ll likely be comfortable with. That’s why (and here’s the second risk) you need to be as certain as possible that the investment you’re making with bridge financing will be worth it. If you’re planning on investing bridge funding into a project that you aren’t sure will turn out to be profitable, then you may be setting yourself up for a financial mess. Be careful!
Business owners are also urged to be cautious when taking bridge loans if they aren’t sure whether or not they’ll receive a larger influx of funding soon. As noted, bridge loans are meant to span the gap between two points of financial stability – if you aren’t expecting an injection of capital shortly after taking a bridge loan, then (again) you’ll likely find yourself in lots of debt in a short period. If you’re careless, bridge funding can go from a form of good debt to bad debt very quickly.
In a nutshell: Interest rates are high, and if you don’t/can’t repay quick enough then you’ll be in a lot of debt in a short time.
Top tip: Before applying for bridge funding, make sure that you have a backup or ‘escape’ plan if that you don’t receive the larger long-term financial boost that you had originally planned on.
Find out which alternative business financing options are available to you through the Become online lending marketplace.
How to qualify & apply for bridge loans
Now that you’ve had bridge funding explained from A to Z, your next question will likely be “How can I apply for bridge funding?” We’ve got that answer for you too!
General criteria that business owners will need to meet in order to qualify for bridge funding include:
- Minimum Debt Service Coverage Ratio (DSCR) between 1.1 and 1.25
- Evidence of prior successes with similar pursuits or projects
- Healthy credit score, around 650 (FICO) or better
- Occasionally, collateral to act as security on the loan
Bridge funding is available to businesses spanning across a wide variety of industries. Of course, if you’re not willing to take on such high interest rates, be sure to investigate other types of industry loans that are specifically relevant to your business.
Step-by-step guide on how to apply for bridge funding:
- Choose your desired loan amount and select ‘Get Loan Offer’
- Fill in the requested information (including time in the industry, revenue, business, etc.)
- Submit your business’s checking account information for analysis
- Wait for offers. You can also review your status by clicking ‘Access Your Loan Application’
- Review offers and select your preferred lender
- Receive the funds to your business checking account
- Review your tailored LendingScore™ dashboard to improve your funding options
- Improve your rates – if your LendingScore™ is insufficient, follow the personalized plan (8-12 weeks to unlock funding)
Final thoughts
Many business owners find themselves asking “What is bridge funding”, and for good reason. It can be a very useful tool when the level of financial pressure begins reaching a critical point. If you were on the lookout for bridge funding explained, then hopefully you now have a much clearer idea of what it is and how you can use it.
To summarize: bridge financing is a great funding solution to help you meet the expenses incurred by a large project, which you expect will generate more profit for you afterward.
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