As a business owner, you may find yourself in need of capital for expansion or simply for unexpected inventory purchases due to increased demand. In pressing situations like these, obtaining a bridging loan can help you scale through.
What is a Bridging Loan?
A bridging loan is a short-term solution that enables you to fund your business until you secure a more permanent source of finance. It is a quick-to-fund loan that you can take on to settle time-pressing expenses. When you obtain a bridge loan, you should pay it off quickly since the interest rates are quite expensive.
Commercial bridging loans differ from those secured by home buyers in the sense that the proceeds from the former are always channelled toward business expenses.
There are two types of bridging loans you should know:
- Closed bridge loans: If you can determine the time when your income flow will be stable, a pre-specified date will be set for the repayment of your loan. When a concrete repayment date is agreed upon, the financial option is known as a closed bridging loan. When you miss the deadline for the repayment of a closed bridge loan, you will have to face some penalties.
- Open bridge loans: these are used by borrowers who are not certain of when their expected future finance will be available. Open bridge loans do not have a fixed repayment date. You should go for this option if you would like to have more flexibility.
However, you should note that closed bridge loans come with lower interest rates since they allow lenders a greater degree of confidence in the repayment. As a result, lenders are more likely to grant a closed bridge loan.
It is wise to go for business bridging loans if you have a pressing deadline that could cost you a major business opportunity or may mean the success or failure of your small business.
Pros and Cons of Bridging Finance
Before you go ahead to secure a bridging loan, you should know the advantages and disadvantages that come with it.
- Bridge loans enable you to act fast so you don’t miss out on a business opportunity before you achieve a more stable income flow.
- You can get a bridge loan even if your credit rating is low, as long as you can offer a decent collateral.
- You may be allowed to defer interest payments until you repay the loan.
- Most importantly, you can apply for a bridging loan very easily. You could be preapproved and receive the funding within a few days.
- Bridge loans often have higher interest rates and fees than other types of funding available for small businesses.
- A bridge loan is a short-term funding option. You need to act fast to secure more permanent funding before the repayment period expires.
- As with every loan, a collateral is required.
- Sometimes, the interest on a bridge loan compounds monthly. You could end up paying a lot more than you expected if the project at hand overruns.
Smart business owners do all they can to ensure that they keep afloat and ensure expansion. Securing a bridging loan can aid the smooth running of your business until such a time funds become available again.