How Bridge Financing Helps Businesses Grow
Bridge loans and other short-term instruments designed to provide access to working capital can be the best way to fund business growth if you know how to use them. That’s because the one common trait all bridge financing options share is the assumption that you’re going through a period where capital is needed, between two periods of relative stability where your income is predictable.
Sometimes, the financing is designed to help you access capital for improvements to property prior to selling it. Other times, it’s made to allow for quick inventory load-ups prior to a demand surge, and there are plenty of other formulations built for a variety of scenarios. In any event, what they all have in common is the opportunity they provide to opt in to opportunities that allow you to greatly increase your annual profits or even your total volume of business.
Choosing the Right Bridge Financing
Bridge loans and advances are designed to minimize payments during the loan period, usually by requiring a lump sum principal payment at the end instead of amortizing. If you’re planning to hold an asset for a short time before reselling it, as you would with inventory, this is ideal. It can also be a good way to fund the labor you need to take on an order that’s larger than your current capacity, as well as the supplies to do the work. The key is understanding your commitments and time frame, so you’re not caught with a final payment before you complete your current deal. Since bridge financing for business growth can have terms between six months and three years, there’s a lot of options to make sure your financing fits, but there are also costs to borrowing on longer terms than you need sometimes. To avoid this issue, look for bridge financing providers who allow you to make penalty-free early payments.
Secured or Unsecured?
There are options that bring down the cost of financing by securing the loan with an asset, but you need to remember the possible downsides to this arrangement before opting into a secured short-term loan. You’ll be able to access more capital, generally, and you’ll pay less for it, but if you default on the loan, the asset can be seized and sold to cover the cost. For that reason, it’s a good idea to secure short-term hard money loans with real estate you don’t depend on, rather than using a home or the business’s headquarters. If you can afford it, unsecured options also mitigate the risk to you, at the cost of higher interest and lower total loan amounts.