What is Bridge Financing?
Bridge financing is a type of loan used to finance the purchase of a new or existing business. The assets of the company typically secure the loan. Bridge financing is generally used when there is a gap between when the business is acquired and when it can be funded through traditional lending channels.
Unlike a home equity loan which can still be used even after the sale of your home, a bridge loan is typically due once your original home sells.
There are several benefits to using bridge financing. If the business is a start-up, then bridge financing can help build inventory and purchase equipment. Additionally, if the loan is only for a short time until normal lending channels are available, there will not be much risk to private lenders in BC since it could easily be paid off quickly.
Advantages of bridge financing
- Can help businesses get off the ground
If businesses struggle to find more traditional financing options, bridge loans can help them get off the ground and running. It can benefit new companies since they will not have much collateral and cash flow to provide lenders with.
- Have short repayment schedules
Bridge loans often need to be repaid quickly, making them an affordable option for businesses that are not yet generating a lot of revenue. It can be helpful in the early stages of a business when money is tight; all you need is to talk to private mortgage lenders in BC.
- Have lower interest rates
Bridge loans typically have lower interest rates than traditional loans, making them more affordable in the short term. It can be helpful for businesses that need to finance purchases but are not generating a lot of revenue at present.
- Can close quickly
Bridge loans can be easy to secure since they are usually short-term with lower interest rates, making them simple to complete within a short timeframe. It makes it easier for new businesses to get funding quickly to continue operating without delays.
Disadvantages of bridge financing
- Need to be repaid quickly
Since bridge loans are often ineffective at securing funding as more traditional options, they will usually need to be paid off soon. If the business is struggling to meet the repayment terms, this can cause a problem for them moving forward.
- Can have higher interest rates
Sometimes businesses that borrow from private lenders may need to pay higher interest rates on bridge loans. It can be more expensive in the long run and may not be feasible for businesses already struggling financially.
- May be difficult to qualify for
Since bridge loans are not as standard as traditional loans, they can be challenging to prepare. It means that not all companies will take advantage of this type of financing.
- Could harm your credit score
If the business cannot repay the bridge loan promptly, it could damage their credit score. It could make it more difficult for them to secure future loans in the future.
Bridge financing is typically used when there is a short-term gap between when businesses purchase and when they can afford to pay their loans. If the company cannot repay the bridge loan, it could hurt their credit score.