Do you know where the repayment money is coming from in three months? Do you need permanent financing, or is a bridge sufficient to span the gap? A business bridge loan helps a business cover a temporary funding gap until a clearly anticipated event occurs in the future that provides either funding or longer-term financing. Some examples of uses of short-term bridge financing may include a closing gap, receivables gap, project funding gap, sale gap, or a permanent loan that is expected but not yet available. Same-day business funding and fast business funding solutions may meet business funding needs to cover a short-term business gap, but such solutions do not include an exit strategy. The business needs to know before funding the first payment what will terminate the financing.

What Is a Business Bridge Loan?

Bridge loans are designed to fill short-term funding gaps for business needs. Funding gaps occur during the short duration between one financial situation and the next. It is expected that the short-term funding will be replaced by the sale of a business unit, closure of a deal, a receivable, or a similar financial transaction.

A classic example of the use of a bridge loan is in the case of commercial real estate financing. The Office of the Comptroller of the Currency defines a bridge loan as a short-term funding solution to allow a newly acquired or constructed property to be held for a period of time until it is either sold or until permanent financing is provided. Commercial real estate funding is the only sector of business funding in which a bridge loan may have certain standardized features. Because of this, business owners should keep in mind that not all bridge loans have the same features.

The reliability of the exit is the primary consideration in the evaluation of a business bridge loan. A loan secured by a speculative sale or uncertain customer payment may simply create a funding problem at a later date.

When Short-Term Bridge Financing Is Used

Short-term bridging loans can help businesses that have a mismatched cash flow to repay the loan. Examples include waiting to lock in permanent SBA or bank loans, funding a project that has a contracted payment that comes after project completion, funding a time-sensitive acquisition, and bridging a gap to a payment that will be received for a service.

The loan size should be the bare minimum needed. Taking the maximum loan amount will lead to increasing repayment costs. The business owner should consider what would happen to the business in an insolvency situation if payments need to be made 30, 60, or 90 days after the expected date of a payment being received.

Bridge loans should not be relied on as a long-term solution to capital. If a business has been using successive bridge loans to fund its operations, it is most likely a sign that the financing structure is arranged poorly.

Bridge Loans vs. Same-Day Funding Products

The main priority for same-day business funding is speed, so providers offer funding through short-term loans, advances, or other underwritten products. If there is a larger opportunity cost associated with funding wait time, then fast funding can be useful. Still, nothing on the label says anything about the total cost of funding or the number of times the funding will need to be repaid.

A true bridge loan is used for a short period of time until a larger funding source becomes available. A fast advance can be used for a longer period of time since it is based on ongoing business revenue. If the funding product requires frequent collections from ongoing business cash flow, then the business may be used to pay funding before the event that was meant to solve the initial liquidity gap.

Determine the exit and compare the products. Ask for the terms of the principal repayment of the bridge, as well as the anticipated timing. Ask for the same information regarding a fast funding product and determine the expected time over which the collection will be made. The funding product with the fastest approval is not always the funding product with the best cash-flow path.

Comparing Speed, Cost and Repayment

Short-term financing can appear affordable relative to dollar fees charged, but be aware of the potential for high annualized cost. This is because short-term financing charges are aggregated over a period of time that is less than a year. For total dollar cost, use the true APR or annualized cost, if taken into consideration.

The owner should also consider the origination, broker, exit, and prepayment fees, as well as the terms for renewal, liens, guarantees, and the cost of refinancing or paying off the bridge loan at the scheduled exit. An unrefinanceable or unexpectedly prolonged draw bridge loan can be a considerable expense. Fast draw loans also create a different kind of pressure from frequent withdrawals.

Create a timeline. Include the date of each draw, expected payments, exit, and worst-case exit. Also include cash flow needs for payroll, rent, suppliers, and taxes, and existing debt obligations. If the draw was not sufficient to fund the business to the exit, the structure should be changed.

When Short-Term Financing Is Actually Appropriate

Short-term financing is justified only when a business has a clear reason for needing the financing and has a clear source of capital for repayment. For example, borrowing to fund an ongoing operating deficit is less defensible than borrowing to fund a repair that will generate revenue tomorrow.

Money Man 4 Business offers term loans, lines of credit, SBA financing, working capital financing, and refinancing; in addition, they offer a range of short-term financing options. Some programs can be as little as 1 year, with others as long as 25 years. If your need is not truly short-term, you may be better off with a longer-term structure, rather than quickly repeating bridge or fast funding financing.

If a business has already committed to several short-term financing, then consolidating financing may be more beneficial than access to further speed financing. The financing that reduces the most business uncertainty is the best option for the business, and should not force the owner to replace financing on a repeated interim basis.

How Money Man 4 Business Helps Separate Temporary and Permanent Needs

Money Man 4 Business analyzes whether the financing need has a short exit or if the business is trying to use temporary financing to address a permanent working capital issue. It is important to differentiate between the two. Bridge financing is helpful if a closing, receivable, or permanent financing is expected; however, if the business is engaging in repeated short-term financing, it can become a cycle.

Money Man 4 Business publishes short- and long-term financing solutions, including term loans, SBA, lines of credit, working capital, equipment financing, and debt refinancing. Depending on their underwriting, some long solutions can be from 1 year to 25 years. If the financing need is expected to last a long time, a bridge or same-day solution would not be appropriate.

Money Man 4 Business also focuses on the consolidation of eligible high-cost debts. For an owner that is already under a lot of temporary obligations, refinancing would offer a better route than providing another bridge. The purpose of the financing should eliminate the payment problem that is being temporarily pushed forward.

The exit strategy must be in place before closing the bridge. If the repayment is dependent on a customer receivable, that receivable must be assured to be paid on the expected date with no risk of a dispute. If repayment is dependent on permanent financing, then the conditions that must be satisfied need to be understood. If repayment is dependent on a sale, then the risk of a lower sale price with a delayed sale must be considered. A bridge is strongest when the exit is clear, certain, and supported by an agreement of the parties.

Frequently Asked Questions

What makes a business bridge loan different from a normal term loan?
A bridge is designed around a temporary gap and a specific expected exit, while a normal term loan is usually repaid through scheduled installments over a longer period.

Is Same day business funding always an MCA?
No. Same-day funding can refer to several financing products. The agreement must identify the actual structure, cost, term, and repayment method.

What is the biggest risk with short term bridge financing?
The expected exit may be delayed or fail to occur. The business should model a delayed-exit scenario before borrowing.

A Bridge Should Have a Visible Other Side

Business bridge loans work for businesses that have clear endpoints for financing. Short-term bridge financing should never become permanent funding. Business bridge loans should connect known endpoints.

Same-day funding and fast business funding can address immediate cash flow issues, but they should not be used without a clear exit strategy. Money Man 4 Business helps business owners with their short-term funding to help align the goals of short-term and long term funding, including lines of credit and refinancing.