Even if your business turns a profit, you may find yourself in need of short-term capital. Businesses of all shapes and sizes need capital. Sometimes this capital is long-term, while other times it’s short-term. Among the most popular forms of short-term capital for businesses is something called a “bridge loan.” So, how does a bridge loan work�and what is it used for?
Bridge Loans Defined
A bridge loan is essentially a type of short-term loan/financing that’s used by businesses until it secures a more permanent funding solution. It “bridges” the gap between now and when the business acquires permanent funding (hence the name).� Bridge loans typically offer up to one year of financing, allowing businesses to meet their financial obligations with immediate cash and capital.
Why would a business or entrepreneur need a bridge loan? There are many occasions during which bridge loans prove useful. If you’re about to launch a new round of financing from prospective investors but need immediate cash to cover payroll and other expenses, for instance, you could seek a bridge loan.
How Does a Bridge Loan Work?
Now that you know a little bit about the purpose of bridge loans, you might be wondering how exactly they work. Well, they work in the similar manner as traditional business loans, only with a few small nuances.
Bridge loans typically have shorter approval times, meaning businesses don’t have to wait as long to receiving funding. Of course, this makes sense considering the primary benefit of bridge loans is fast, immediate capital.
But there are also some caveats to bridge loans that business owners need to be aware of. While they tend to have shorter approval and application times — at least when compared to traditional business loans — bridge loans carry higher interest rates and associated fees.
Is a bridge loan right for your business? Being that no two businesses are the same, there’s no easy answer to this question. They are certainly a useful tool for acquiring short-term capital. But if you need a more permanent funding solution, it’s probably best to avoid bridge loans and their high interest rates/fees. In any case, you should carefully weigh the pros and cons of all funding options to determine which one is best suited for your business.