In a perfect world, every business would have high liquidity and unlimited cash flow. But the unfortunate reality is that over 30% of small businesses fail because they lack adequate financing—and to help you achieve that next step, you might be wondering,” What is a bridge loan?”

That’s why understanding how to leverage debt is so important. Not all debt is bad debt. In fact, wisely investing in a loan can generate immediate value and create long-term wealth. This is known as good debt.

There are many financing options that can create good debt. But the business bridge loan, in particular, is unbeatable when you need a fast capital infusion. As we discuss below, it’s a short-term loan best suited for the acquisition of real estate. Let’s explore how it works, the pros and cons of bridge loans, and whether it’s right for you.

What Is a Bridge Loan and How Does It Compare to Traditional Loans?

Most business owners are familiar with traditional loans. You receive an agreed-upon amount that will be repaid in installments over a certain period of time and with a certain frequency. Payments are subject to interest rates and other applicable fees (origination fee, payment processing fee, etc.).

Sure, that part is simple. But applying for a traditional loan is actually a long, complex, and often painstaking process. Further, applying for any type of financing with a big bank entails a high chance of rejection.

Between the time it takes to secure a loan and the odds of not securing one at all, it’s no wonder that many small- and medium-sized businesses (SMBs) can’t get the financing they need—when they need it.

A bridge loan solves this problem.

From application to approval to funding, securing a bridge loan is significantly faster than traditional loans. The expedited process makes it an attractive option for companies in urgent need of financing.

It can be used to meet imminent financial requirements such as payroll, inventory, or new equipment. But, most of all, it allows organizations to leverage the equity of existing properties to invest in new real estate opportunities.

The bottom line is that bridge loans increase working capital, making it possible to secure your short-term position while awaiting long-term financing.

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How Does a Bridge Loan Work?

Let’s look at how a business bridge loan actually works. We also examine other common types of bridge financing you should know about.

Business Bridge Loans

The answer to the question “how does a bridge loan work?” is hidden in plain sight. The term itself is a nod to the figurative bridge that it creates between a short-term loan and long-term financing.

For example, suppose you’ve been approved for a bank loan in the range of six figures. But, because loans are split up into tranches, it may be months before you receive your first sum. In cases like these, companies may consider applying for a loan to bridge the gap.

This type of loan is known as debt bridge financing: A lender issues your business a lump sum based on a percentage of your real estate equity. The loan is then repaid upon the arrival of your next big capital infusion, usually within a few months to a year.

Equity Bridge Financing

The advantage of debt bridge financing is that it allows you to maintain full control over your company. But some businesses may balk at the level of risk. Instead, they opt for what’s called equity bridge financing.

This is when a business exchanges a percentage of ownership for a period of short-term financing. Because ownership is delivered as equity stakes, the investor trusts that the business will increase in value over time.

At the end of the loan term, the business will buy back their shares; of course, if everything has gone as planned, at a much higher stock price.

IPO Bridge Financing

In contrast to debt bridge loans, IPO bridge financing is based on equity. This type of financing is used to cover various expenses (stock exchange fees, underwriting fees, etc.) when a company decides to go public.

Typically, an investment firm will underwrite a company’s new stock issue, supplying the necessary capital for an initial public offering (IPO). In exchange for financing the IPO, the recipient gives the lender a number of discounted shares. As the business raises money from their IPO, financing is repaid.

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How Do I Get A Bridge Loan for Business?

Bridge financing can be obtained from a variety of sources, whether it’s a venture capital firm, investment bank, or alternative lender.

If approved, financing may be provided as either a loan or an equity investment; however, most business owners prefer the former, as it allows them to maintain control over their company.

Financially stable organizations have better odds to qualify for a bridge loan than those with the potential for long-term financial troubles. That said, bridge loan lenders are all different, with online lenders offering the most flexible criteria. To learn more, check out our guide to securing a small business loan.

Bridge Loan for Business: Pros and Cons

Now that we know what bridge financing is, how it works, and how to obtain one, let’s wrap up with its pros and cons.

Advantages

• Obtaining a bridge loan is a lot faster than other loan options. This makes it particularly suited to businesses in need of a quick capital infusion.
• Bridge loans help companies avoid cash flow problems caused by long payment cycles or spread out tranches.
• Bridge loans make it possible to acquire new properties based on the equity of existing ones.
• Compared to equity investments, debt bridge loans don’t require you to relinquish control of your business.

Disadvantages

• Bridge loan payments have higher installments than other loans.

• Bridge loans may be subject to higher interest rates than other options.
• Bridge loans can be risky if your long-term payment source falls through. That said, studies have shown that only 1% – 2% of businesses default on a bridge loan.

Securing a Bridge Loan is Fast and Easy, With 90paydex

As we’ve seen, bridge loans are an excellent short-term financing option—especially for companies who need a financial edge in real estate or a fast capital infusion.