As a business owner, you sometimes encounter opportunities that require you to respond quickly. This may occur when, to expand the size of the business, you might require a down payment for new property and haven’t sold old property yet, or before making an IPO and incurring costs before that’s complete, you will need finance to pay.
A short term Business Bridge Loans or hard money loan can be considered a fast source of funding to stimulate your company’s needs while you await other financing alternatives.
Do you ever think about a bridge loan for your business, or are you a broker with clients who would need to use a bridge loan? Learn about business bridge loan requirements, how bridge loans work, and some mistakes not to make in an application.
How Does a Bridge Loan Work?
Business Bridge loans are also referred to as gap financing or swing loans that are short term. Like a regular loan, when you obtain a bridge loan, you receive the entire amount and must start repaying it immediately. However, in most cases, this loan amount has to be paid back in a couple of months or a year.
Sometimes, the company must pay only monthly interest or an end-of-term payment. In such cases, however, the total term of the loan is often shorter than that of a standard loan.
Business Bridge Loan Requirements
It is best to prepare before applying for a bridge loan. Understand the lender’s requirements so you can quickly get the funding you need.
Here are some of the bridge loan requirements you can follow:
Clear Purpose for the Loan
Be clear about what you want the loan for when you apply for a bridge loan. Do you need the money to help purchase new inventory? Or do you just need funds to help cover a short-term cash flow issue? Clearly indicate the purpose of the loan and at what time to expect longer-term financing. This could be a clear exit strategy for you and help you raise funds.
Creditworthiness
The lender checks your credit score when you apply for conventional loans. However, the lenders of a bridge loan will also check your creditworthiness. They might be more flexible and overlook a business with poor credit. However, you may pay very high interest rates with poor or bad credit.
Collateral
Most companies providing business bridge loans demand collateral. This means you will need to collateralize the loan using an asset like real estate. Collateral serves to secure the lender. In case you default on the loan for any reason, the lender will be able to repossess the asset. Having assets such as real estate or equipment may also work in your favor for loan approval.
Revenue
Other factors the bridge loan lender will consider before extending a loan to you include your debt-to-income ratio and revenue. Your debt-to-income ratio should not exceed 50%, which is the amount most lenders allow.
The more you make and the less debt you have, the more likely you will be approved. You often need to provide financial information to obtain a bridge loan, such as a cash flow statement. This requirement of a business bridge loan ensures that you have an exit strategy to repay the loan.
5 Mistakes to Avoid When Applying for a Bridge Loan
While applying for short-term financing is sometimes less complicated than longer-term solutions, the borrower may make common mistakes. Before you submit your loan application, make sure you understand what business bridge loans for small businesses requirements entail and avoid falling into any of the following pitfalls:
Do Not Do Research: Take the time to research and shop around with different lenders to ensure you are getting the best loan terms for your business. You can also hire a broker to help guide you through your options.
Fine Print Overlooking: Check a bridge loan application’s fine print and terms. You should know how to repay the money in weeks or months. The other fees are closing costs.
Not presenting collateral: Since a bridge loan is secured, you will require collateral equal to or more in value than your loan amount. Though a real estate investment is very common in providing such collateral, you may even offer pieces of equipment and, in many cases, business invoices as an asset to avail this financial facility.
Rushing The Process of Application: A bridge loan requires immediate action, but a rush in the application process results in one committing mistakes and losing the deal. Take some time to read the instructions carefully, and include all relevant financial statements.
Final Thoughts
There are many loans out there for businesses that need capital. A bridge loan can help your small business move fast on an opportunity or fill a cash-flow gap while you wait for other loans.
Understanding the requirements before applying for a small business bridge loans increases your chances of approval. Ensure you have enough collateral and revenue; read the fine print beforehand. Most importantly, you should develop an exit strategy and plan to pay back the bridge loan.
There are many loan options available to businesses that need business capital funding. A bridge loan can help your small business seize an opportunity quickly or fill a cash-flow gap while you wait for other loans.
Understanding the requirements before applying for a bridge loan increases your chances of approval. Make sure you have enough collateral and revenue; read the fine print beforehand. Most importantly, you should develop an exit strategy and plan to pay back the bridge loan. For more information, check out our Guide to Bridge Loan to navigate this financial option effectively.
Do you have clients who cannot get the funding necessary to pay you? By partnering with Purple Tree Funding, you can help your clients find the bridge funds they need to meet their goals. You can also increase your sales so your clients can run small businesses.
