Bridge loans are short-term funds that "bridge" the gap between today's need for immediate cash to pay bills and the final closing of a pending investment deal or long-term financing package.
Sooner or later every small business needs a little cash to tide them over to the next big deal or investment payoff.
However, finding the cash you need isn't easy - unless you've learned the secret of bridge financing.
If your business is experiencing a cash flow crunch, you're not alone. Many small businesses experience temporary cash shortfalls as they wait for pending receivables, long-term financing, or another source of revenue.
Banks and lending institutions usually understand the needs of small businesses and offer bridge loans as a financial solution to cash-starved companies. But a bank is not likely to provide bridge financing simply on the basis of your good intentions to repay in 30, 60, 90, or 120 days.
Instead, they require solid evidence that their investment is in good hands. If you're in the market for a bridge loan, you'll need to offer that evidence in one of the following forms.
It's possible that a lender may be willing to extend a bridge loan on the basis of earnings alone. The catch is that you will need to demonstrate an excellent credit history, a consistent track record of profitability, and strong sales capable of repaying the loan within a short period of time. Unless you are able to fulfill all of these requirements, you will need to find another way to obtain financing.
If your earnings history doesn't quite live up to the bank's standards, you may be able to offer collateral to sweeten the deal. Equity in real estate, equipment, and other capital assets are all fair game. The upside is that a lien gives the bank the incentive it needs to approve the deal. The downside is that you could end up losing some of your assets if the loan goes south. The bottom line is that before you agree to a bridge loan, make sure you understand the risks.
An alternative source of bridge financing can be found in a factor. A factor is a firm that is willing to give you upfront cash for receivables. Although you won't receive the full face value of your receivables in advance, you can receive up to 70% of your receivables' value from a factor, subject to certain variables such as the typical return rate for similarly sized businesses in your industry. Not surprisingly, the factor takes a percentage for their services, so you'll need to weigh the factor's fee against the interest rate of a traditional lender to determine whether factoring is your best option.
Investors may provide another source of bridge financing, particularly if a significant equity funding deal is in the works. There are several ways in which the deal can be structured, but typically the bridge financing is provided on the strength of the pending influx of capital. If equity funding is coming from more than one source, it is even possible to obtain bridge financing on the basis of the combined investment amount.
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