How Commercial Bridge Loans Work (and How They Can Benefit Your Small Business)

What Is Bridge Financing?

While not representing a particular loan type, a commercial bridge loan, by definition, is short-term financing used to help tide over a business during a temporary cash crunch. The funds can be available quickly and used to act on a time-sensitive opportunity or sustain business operations.

How Does a Business Bridge Loan Work?

Bridge financing — as the name implies — is short-term funding that serves as a “bridge” between your immediate need for capital and a long-term financing solution (or an expected influx of cash).

A borrower enters into a bridge loan agreement intending to quickly pay it off or refinance it with a long-term loan.

Small Business Bridge Loan Characteristics

Here are several features of commercial bridge loans: 

• Stop-gap measure: Small business bridge loans “bridge” the gap between an upcoming expense and an influx of capital, such as a loan, mortgage or proceeds from a sale.
• Short-term solution: How long can you get a bridge loan for? Bridge loan terms can be as short as a few weeks or as long as 2 years.
• Quick to fund: Bridge loans must be quick to fund. For this reason, alternative lenders — with their streamlined online applications and abbreviated underwriting processes — have become a go-to resource for small business owners in need of interim financing. Depending on the lender and circumstance, funds can be secured as soon as 1 day.
• Nonrestrictive: Bridge loans most commonly are used for property acquisitions but can be leveraged to address any business expense.
• Flexible terms: Borrowers can choose to pay off a bridge loan before or at loan maturity. For this reason, ideal bridge loans for small businesses are free of prepayment penalties.

Reasons to Use Commercial Bridge Loan Funding

Let’s explore a few common uses for commercial bridge financing to see how they work and what that can mean for your small business.

Invest in Commercial Real Estate

When many hear the term “bridge loan,” commercial real estate comes to mind. Business owners use bridge loans to jump on a  time-sensitive real estate deal. Once a property is secured, the real estate bridge loan can be refinanced with a more affordable long-term mortgage.

Others use bridge financing to rehabilitate a property. For example, a building may be in the perfect location, but it might not meet the lender’s requirements. A business owner might fix the building first, then secure a mortgage. They can use a real estate bridge loan to purchase the property and fund the renovations, then refinance the newly rehabbed property with a traditional mortgage.

Sustain a Business Before Acquisition

Distressed businesses can take out bridge loans to ensure smooth operations while they search for an investor or buyer. In this scenario, the company has an impending source of capital lined up — investor funds or the proceeds of the business sale — as an exit strategy from the bridge loan.

Bridge Gaps in Cash Flow

Business owners and companies can also use a bridge loan to finance working capital and cover expenses. For example, short-term bridge loans can cover utility bills, payroll, rent and inventory costs.

Here’s how businesses in different industries might use a business bridge loan to address a temporary gap in cash flow:

• Service companies: Many businesses in the service industry get paid at the beginning and end of a job. Bridge financing can tide operations over while they await final payment.
• Manufacturers: Manufacturing companies tend to have high capital needs. The process of fulfilling a large order includes the cost of making the product and delivering it to the customer. And like businesses in the service industry, manufacturers typically get paid after the product is delivered. Bridge loans can be vital to sustaining this type of business model.
• Seasonal shops: Seasonal businesses must stock up on inventory and staff before their annual rush. Short-term bridge financing is ideal in such scenarios. Funds can prepare the business for the season, and the subsequent revenue can be used to close the small business bridge loan.

Acquire Bridge Financing for Your Small Business

Provide Interim Capital While Awaiting Permanent Financing

Another reason small business owners may seek a business bridge loan is when they can’t qualify for permanent financing due to credit issues. The temporary funding can allow borrowers the time needed to repair their credit, after which they can refinance for longer-term funding.

5 Small Business Bridge Loans and Financing Options

If you determine that bridge financing is the best solution for you, here are 5 options to consider, including a list of pros and cons for each:

1. Commercial Real Estate Bridge Loan

If you’re looking to acquire or make renovations or other capital improvements to a property, you might seek a commercial real estate or mortgage bridge loan.

Pros

• Provides funds to buy or improve a commercial, residential or industrial property while you’re waiting to make a profit from your real estate investment
• Alternate funding option when permanent financing can’t be obtained (e.g., the property needs significant renovation, unsatisfactory credit history)
• It can be used for non-owner occupied properties

Cons

• Requires collateral (e.g., property being borrowed against)
• Specifically for real estate
• Higher interest rates than conventional commercial loans
• May have a clause requiring full payment of the loan upon the sale of the property

2. Business Line of Credit

You can use a business line of credit to bridge short-term funding gaps. With this financing, your lender authorizes a set amount of funds from which you can draw money whenever you need. You pay interest only on the funds you borrow.

Pros

• Use flexibly
• Pay interest only on the funds you borrow
• Build your credit in some cases

Cons

• Collateral may be required
• May have costly fees
• May have to resubmit paperwork to reuse funds

3. Short-Term Loans

Short-term loans can also be used as a type of bridge financing. They’re similar to conventional term loans but are smaller in scale and have much shorter repayment schedules.

Pros

• Limited paperwork
• Fast approvals
• Variety of uses

Cons

• Can be expensive
• Accelerated repayment schedule (daily or weekly)

4. Accounts Receivable Financing

Another option is accounts receivable financing, which turns unpaid invoices into capital. Lenders charge a weekly fee until your customer pays off the financed invoice.

Pros

• Near-immediate access to cash
• Low qualification requirements
• No collateral required

Cons

• Clients with bad credit could disqualify you
• No guarantee of invoice collection
• Recurring weekly fees

5. Merchant Cash Advance

Another possibility to bridge cash-flow gaps is a merchant cash advance. With this financing, a lender gives you a set amount of cash upfront. Then, you repay this advance plus their fees with a percentage of your sales.

Pros

• Low qualification requirements
• No collateral required

Cons

• Can be expensive
• Daily repayment is common

• Commercial Bridge Loan Lenders

  Where can you turn when you need a bridge loan for your business? Here are a few types of commercial bridge loan lenders to consider:

  • Private lenders
  • Investment companies
  • Banks
  • Debt funds
  • Alternative lenders

Qualifying for a Bridge Loan

It can be easier for borrowers to qualify for a commercial bridge loan when compared with long-term financing. 

That said, commercial mortgage bridge loan lenders will typically require you to offer collateral for your loan (e.g., real estate). Additionally, for commercial real estate bridge loans, you’ll likely only be able to obtain financing for up to 80% of the property value. 

To qualify for a commercial mortgage bridge loan, you may need a debt service coverage ratio of 1.25 or higher, a credit score of at least 650, a net worth equal to or greater than the loan amount and experience with similar projects. You may also need to provide documentation for the lender to review, such as income and expense statements, tax returns, renovation cost estimates and exit strategy details.

In contrast, for unsecured business loans that could be used as a form of bridge financing (i.e., business line of credit, short-term loan, merchant cash advance), you do not need to offer specific collateral. However, lenders will likely require a personal guarantee or general lien. 

Additionally, you’ll need to meet minimum annual revenue and time in business requirements, which could be a few months for a merchant cash advance or 1 year or more for a short-term loan or business line of credit. You’ll also need to satisfy credit score requirements, ranging from a minimum of 500-560 depending on the specific funding type. Other considerations could include a borrower’s debt-to-income ratio, business plan and payback plans.

Small Business Bridge Loan Rates, Fees and Expenses

Compared with typical forms of financing, a bridge loan is generally more expensive, with higher interest rates and fees. According to Forbes, business bridge loan interest rates often range from 15%-24%. Additionally, borrowers might be responsible for the following fees:

• Loan origination fee
• Administration fee
• Appraisal fee
• Escrow fee
• Title policy costs
• Notary fee

Before coming to terms on a bridge loan agreement, evaluate the return of investment you could expect to see from the loan. Ultimately, you’ll need to weigh the costs of this type of short-term funding against the benefit of being able to act on an opportunity or sustain the business.

In general, borrowers accept these terms because they require fast, convenient access to funds. In addition, they are willing to pay high interest rates because they know the bridge financing is short-term and plan to pay it off quickly with future proceeds or low-interest, long-term financing.

• Alternatives to Bridge Financing

  You may consider these options if you need funds fast and seek alternatives to business bridge lending.

  Personal Loan

  Personal loans typically don’t have funding restrictions and don’t usually require collateral. This is another option if you don’t qualify for a conventional loan or bridge financing. However, personal loans typically have short terms and lower funding amounts.

  Home Equity Loan or Line of Credit

  Sometimes called a “second mortgage,” home equity loans are lump-sum payments secured by your home’s value or equity, often with fixed interest rates. Similarly, homeowners can tap into their home’s equity on an as-needed basis with a revolving line of credit at a variable interest rate.

Refinancing Short-Term Business Bridge Loans

Because a bridge loan is a temporary capital solution, business owners must identify a clear exit strategy. For example, if you don’t anticipate a sudden cash inflow, you’ll need to refinance your bridge loan with a longer-term solution. 

If you lack the credentials to qualify for a traditional bank loan, a Small Business Administration (SBA) loan is an excellent option. SBA loans can be as large as $5 million with repayment terms as long as 25 years and interest rates can start as low as prime plus 2.25% for 7(a) loans. These terms are favorable because the SBA guarantees a percentage of these loans, reducing the overall risk for lenders.

Related: Prime Rates: How They Work and How They Impact Small Businesses

Is a Small Business Bridge Loan Right for You?

Business bridge loans are valuable tools in any entrepreneur’s financial toolbox. You can act on cash-flow emergencies and seize unexpected business opportunities with them. While rates and fees may appear prohibitive, weighing the cost of financing against the benefits can prove worthwhile.