March 19, 2024

Six Questions to Ask About Commercial Bridge Financing


  • Business Finances

  • Small Business Loans

When a homeowner wants to buy another home before they sell their existing one, they might use their current house as collateral for a short-term loan. Likewise, business owners can use commercial bridge financing to fill a gap in funding, whether it's to purchase real estate, equipment, or even to hire new staff to manage a huge new project.

Like any sort of funding product, bridge loans come with pros and cons. These can help you determine if commercial bridge financing is right for your business.

1. Do you need fast access to cash?

The turnaround time for applying for and getting approved for a bridge loan is typically much shorter than a traditional loan. This is particularly useful if you're in a tight turnaround situation, such as bidding on a job for which you might need additional resources quickly if the bid is accepted.

2. Do you want to avoid loan deals with your equity partners?

Business owners may look for a short-term loan through their equity partners. But in many cases, that means giving the partner a larger stake in the firm. A bridge loan means there's no need to dilute your stake in the company

3. Navigate long payment cycles.

Last year's tricky economic conditions caused anxiety about cash flow among small business owners, says the U.S. Chamber of Commerce. If you're feeling this pinch and you think a potential new project may put even more temporary demands on your cashflow, bridge financing can help. For example, if you own a construction business, you might get paid at the beginning and end of a project — but between those milestones, you'll still need cash to complete the project and meet your overhead expenses. Bridge financing can help you mind the gap.

4. Can you handle a large payment?

A bridge loan's shorter payoff term — typically from 3 months to 18 months — means your monthly payments will be larger than a typical long-term loan's amounts. So if you're seeking a bridge to manage a cash flow crunch, add its payments into your cashflow planning.

5. What are the liabilities of relying upon future income to pay off a short-term loan?

If you've taken out a bridge loan, you may be basing it on the promise of a contract from a new customer. But what if that payment falls through or takes much longer than you expect? You could be stuck with big payments you can't afford to make.

Another downside: The combination of a bridge loan and late-paying client will affect your company's debt-to-income ratio, albeit it temporarily.

6. Can you deal with higher interest rates?

Since bridge financing is a short-term proposition, you'll pay interest for less time. To make up for this, some lenders may charge a higher interest rate on bridge loans than on a longer-term agreement. So while you might pay total less interest for a bridge loan, you might also pay it at a higher rate. Lenders may also charge origination fees and closing costs, or other additional charges.

Once you understand the benefits and caveats of a bridge loan, you can make a better decision about it fitting one into your business strategy.

Since 2008, Fora Financial has distributed $4 billion to 55,000 businesses. Click here or call (877) 419-3568 for more information on how Fora Financial's working capital solutions can help your business thrive.