One option if you are tight on cash is to do a short-term bridge loan until other forms of finance free up.
Things to Know About Bridge Loans
What Is a Bridge Loan?
A bridge loan is a type of short-term loan, which is typically taken out for a period of two weeks to three years. You can use a bridge loan to meet short-term liquidity requirements until permanent financing is secured.
Bridge loans are always backed by some collateral such as business inventory or real estate. Bridge Loans are also known to have higher rates and fees.
Historically, you can use Bridge loans for real estate deals that involve the purchase of property, retrieval of real estate from foreclosure, or making a down payment before long-term financing is ensured.
As a business, on the other hand, you can use bridge loans to inject liquidity so you don’t run out of cash during this crisis.
Advantages of Bridge Loans
Unlike many other types of financing, bridge loans require little documentation and can be arranged quickly. This gives the borrower peace of mind that they will soon have the necessary funding to cover their immediate needs without losing any of their assets.
Disadvantages of Bridge Loans
The main downside of bridge loans is that they have a higher interest rate than most types of financing. This means that the borrower will be paying higher fees until he/she secures stable financing to cover the loan.
Bridge loans from banks are not worth the effort. You’ll have to do so much in documentation and guarantees and collateral analysis that by the time the bride loan is done, you might as well have done a typical loan.
Typically the best sources for a bridge loan are family members, friends, angel investors or others in your area. If you are highly confident in your ability to get medium to long term financing, but need a short term bridge, approach those sources.
Family sources or friends with financial resources are great sources for bridge loans. They can often move quickly and are interested in helping someone they know and trust.
Another great idea is to talk to your accountant and ask him if he knows anyone in the local community who might be interested in doing a bridge loan. Quality accountants almost always have good contacts interested in taking advantage of opportunities to improve their return.
Terms and Documentation:
Don’t treat a bridge loan with a family member (or anyone else for that matter) lightly. It’s important to document the loan properly for both the lender and the company borrowing the money, the borrower.
Plus, if you want to deduct the interest payments as an expense for your taxes, you’ll need to formalize the interest charges and documentation of payments.
Expect that the interest rate will be anywhere from 8-15% annual percentage rate in today’s COVID-19 world, but remember this is a bridge loan and you will be using it to “bridge” your business until you can get more secure, market-rate based long term financing.
If you secure a long term loan from the SBA for instance, your financing will be much less than 8-15% and closer to 2-4%.
Because of the short-term and fast nature of securing a bridge loan, lenders will want you to guarantee the debt personally and pledge any collateral you might have available.
This may seem onerous, but remember your plan is to replace this loan with another loan and you expect these terms to be a short term event.
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