Understanding the Basics of Bridge Loans
If you notice your company is frequently running into obstacles with its working capital, it’s smart to do something to fix the problem. Without smooth cash flow, it’s hard to expand your profits or take advantage of opportunities that arise.
One solution is to change the way you bill customers so you have more capital on hand when you need it. Unfortunately, this isn’t always an option, especially if you work with insurance companies or sell to other businesses.
Another option, often a more practical solution, is to get short-term financing. These short-term loans are known as bridge loans. They’re designed to help businesses improve available working capital.
Who Can Use Bridge Loans?
There are several types of businesses that can take advantage of bridge financing. One notable industry is real estate. The flexible nature of short-term loans makes them an excellent fit for house flippers and real estate developers. The funds work well for closing quickly on properties, in weeks instead of months.
A bridge loan can fund everything from the purchase to remodeling needs. Whether the idea is to perform simple improvements or completely renovate and expand, there are no limits. This is in stark contrast to traditional mortgages, which rarely back large-scale remodeling of any kind.
The second type of industry that often turns to bridge financing is business-to-business sales. B2B companies such as manufacturers, distributors, and wholesalers need sufficient funds to pay suppliers and keep operations going. To fulfill client orders on time, they need to have the working capital to purchase inventory, sometimes quickly.
Some retailers use bridge financing to adapt to seasonal ordering changes. Their cash flow may be sufficient for normal operations, but the spike in demand around holidays can require adapting. The extra working capital with the help of bridge loans comes right on time.
How Does a Bridge Loan Work?
Because this type of financing is provided by alternative lenders, the specifics vary depending on the lender you choose and your company’s specific needs at the time. For example, hard money loans are a form of bridge loan that requires using business assets as collateral. This option is common for manufacturers.
Other lending options use the item for purchase as collateral, which is what real estate companies do. Sometimes, accounts receivables can also act as backing for financing. The right solution should be tailored to your company’s capital needs, revenue and opportunities. Short-term funding is a powerful tool when you use it correctly.