If you need quick access to funds to get your business up and running, bridging loans are a great option. Unlike traditional loans, bridging loans provide short-term financing for businesses, allowing them to bridge the gap between expenses and when other funding sources are not immediately available.
Are you wondering whether a bridging loan may be right for your business? This article will explain what bridging loans are, how to assess your business needs, and the steps you need to take to secure this financing option.
Understanding Commercial Bridge Loans
Bridging finance is essential for businesses to capitalize on opportunities that may otherwise have been foregone due to a lack of liquidity. This funding option provides entrepreneurs with an invaluable opportunity to grow their enterprises without sacrificing financial stability.
For instance, businesses waiting to finalize a sale or acquisition can use bridge financing for their daily operations. A bridging loan can provide much-needed working capital for home-flipping companies that need significant renovation funds and contractors who need to finance new projects while waiting to be paid for their previous work.
Lending companies offer various solutions to businesses with different needs and in different situations, making bridging loans a flexible option. Check this out to learn how a reliable bridging loan partner may help you.
Bridging Loans Vs. Traditional Loans
Bridging loans differ from traditional loans in several ways. They typically last anywhere from six months to one year and require less paperwork than traditional loans, making them faster and easier to obtain.
Additionally, bridging loans provide flexibility that’s unavailable with traditional bank financing options. They can be ready as early as one or two days, making them ideal for businesses looking for fast cash flow solutions or those with limited funding options. Because most bridge loans are secured against a borrower’s assets, they may offer higher credit values than conventional business loans. However, it’s important to note that commercial bridge loans often carry higher interest rates because they’re short-term loans. As such, borrowers must ensure their new venture can generate more than enough cash for repayment.
How To Get A Commercial Bridge Loan
Bridging loans are most commonly used by businesses that need immediate funds but don’t have access to traditional sources of financing, such as regular business loans or venture capital. The following steps can help make the application more seamless:
- Assess Your Business Needs
Evaluating your current financial situation and plans can help you decide if a short-term loan is the right solution for you. Before applying for a bridging loan, it’s important to understand what kind of business needs you have. Outline how much money you’re looking for, what it will be used for, and when you expect to repay the loan amount plus interest in full. Consider whether you have other options and research and assess all your options to ensure that the bridging loan is the best choice for your business needs now and in the future.
- Prepare Your Collateral and Documents
After identifying a revenue-generating opportunity that needs to be funded quickly, business owners must identify their collateral offer. This refers to the asset they’re willing to put up to secure the loan, typically one or multiple real estate properties. Commercial bridging loan lenders consider the loan-to-value (LTV) ratio, ranging from 65% to 80%.
A loan-to-value (LTV) ratio measures how much a lender is willing to lend based on the appraised value of the asset used as collateral. It’s calculated by dividing the loan amount by the asset’s value and is used to assess the risk of lending to a borrower. A higher LTV ratio means the lender is taking a higher risk, which is often true for government-backed financing options.
Gather your business financial documents and keep an updated business plan, if possible. While lenders may have different eligibility requirements, your business must have an excellent credit history and robust financial performance to qualify for commercial bridging loans. Besides meeting the lender’s criteria, the borrower is often asked to have an “exit” plan, or how they plan to pay the loan and transition to the more regular mortgage lending setup to repay their remaining balance.
- Find the Right Lender
Finding the right lender is essential for getting the loan you need. Research different lenders and compare their rates, terms, fees, etc., to make an informed decision. Consider any additional services they offer that may benefit your business lending needs. For example, some lenders provide guidance or advice on best using a loan based on your circumstances. Additionally, look for any extra features the lender offers, such as extra repayment flexibility or robust customer service options, before making a final decision.
- Understand Loan Terms and Conditions
Once you’ve completed the loan application process, it’s time to review the terms and conditions of the loan. While it may seem overwhelming, reading and understanding the fine print is essential before signing any documents.
Understanding the loan terms will help you decide whether a bridging loan is the right choice for your business. It’s important to note that different lenders may offer varying terms, so it’s worth shopping around for the best deal.
Repayment, Interests, And Other Fees
Some of the most common terms and conditions associated with bridging loans include repayment periods, interest rates, fees and charges, security arrangements, and penalties for late payments.
Repayment periods typically range from six months to one year, but this varies depending on the lender’s requirements. Interest rates are generally higher than those associated with traditional loans as they are intended to provide short-term finance solutions.
Multiple fees and charges apply when setting up or taking out a bridging loan, so it’s important to factor these into your financial calculations before committing to anything. Security arrangements indicate how the lender manages your collateral during the loan’s term and in case of default. It’s crucial to read all documents thoroughly and ensure everything is in order before signing anything. After approval, your commercial bridging loan will be released in no time.
Final Thoughts
Bridging loans are an excellent way to help your business quickly access the capital it needs. To increase your chances of approval, ensure your business has sound financial performance and meets the other eligibility requirements set by the lender.
Moreover, you must assess your business needs, prepare a thorough loan application, understand the loan terms and conditions, and find the right lender. With the right preparation and understanding of the loan terms, you can easily secure a bridging loan for your business and get back on track toward achieving your business goals.
