What is a bridge loan for small business?

Keeping a business afloat is all about cash flow. You might know you’ll have access to money down the road, but that doesn’t do anything for your expenses now — from accounts payable to payroll. If you need money fast to bridge the gap while waiting for future financing, you might turn to a business bridge loan.

What is a business bridge loan?

As its name suggests, a business bridge loan bridges the gap between your current financial need and the future money that you have coming. A bridge business loan may also be called gap financing or interim financing. The perk of these loans is that the application process is generally streamlined, and they fund fast — often in about a week.

You might use this type of business loan to get cash in hand while you wait for financing to get sorted out with a commercial real estate loan or Small Business Administration-backed (SBA) loan, for example.

But this is a particularly risky type of loan. In exchange for the fast turnaround time bridge lenders offer, they charge high interest rates and have short, aggressive repayment timelines. Your small business bridge loan might also come with a hefty origination fee.

What can you use a business bridge loan for?

With a high overall loan cost and a short repayment timeline, you might be wondering why business owners choose bridge loans.

They certainly may not be the best small business loan option in terms of the overall cost, but bridge loans can be useful. Here are a few ways to use bridge loans:

• Buying commercial real estate: Let’s say your dream office just hit the market. Getting a commercial real estate loan can take a while, and you don’t want to let the property slip through your fingers. You might take out the bridge business loan to get the office with a plan to refinance once your commercial real estate loan goes through.
• Waiting on an SBA loan: While loans backed by the SBA can be particularly useful for businesses, getting them is anything but quick. A small business bridge loan could help you get the cash you need for pressing expenses now as you go through the SBA’s long application process.
• Bridging a gap before your next round of fundraising: If your company plans to go through another round of fundraising in the near future, a bridge loan can help you extend your runway until money from investors comes in.

How does a small business bridge loan work?

Usually, applying for a business bridge loan is a streamlined process. You’ll generally need to have a good personal or business credit score and put up high-value collateral to secure the loan. Most bridge loan financing funds quickly, meaning if you’re approved, you could have the money in a week or less.

Once you get the loan, be ready for an aggressive repayment schedule. Some bridge loans require weekly or daily repayments. If you stay on top of your repayment plan, it can help build your business credit (assuming the lender reports to a credit bureau). But if you don’t, it could hurt your credit score — and your chances of securing the financing you’re planning to use to replace the bridge loan.

Because the small business bridge loan is supposed to be a short-term form of financing, these loans generally don’t come with early repayment fees or prepayment penalties. Ideally, you want to get your more permanent financing set up quickly to repay the bridge loan. This helps you avoid living with the loan’s high interest rate for too long.

Where can you get a bridge loan for business?

You have a few options for seeking out bridge loan business financing:

Banks and credit unions

It’s relatively rare for banks and credit unions to offer business bridge loan financing, but some do. If you have an existing relationship with one of these financial institutions, you can ask if they offer these types of short-term loans.

Online lenders

Alternative lenders have expanded small business bridge loan options.

Because online lenders make it so easy to explore a business bridge loan, look into options from a few different lenders and compare rates to make sure you’re getting the best deal. And before you move forward with one, do your homework to make sure the lending institution is legitimate.

Private bridge loan lenders

Also called direct lenders, these private companies use their own money to fund business bridge loan financing. Because they have full control over the lending process and no outside stakeholders to report to, private lenders may be more willing to work with you on the loan terms (i.e., accept more collateral in exchange for a lower credit score).

Alternatives to bridge loans

While a bridge loan could help you bridge a cash flow gap for your business, it’s not without risks. As a result, you should compare it against other forms of small business financing, like:

• Term loans: Similar to a bridge loan, you repay the lump sum over a set term. Traditional term loans can have repayment terms lasting up to 10 years and relatively low interest rates but often take longer to fund. If you work with an online lender, you may be able to get that money in a matter of days but could pay more in interest and fees in exchange.
• Grants: These are ideal because it’s money you don’t have to repay. The trick with grants is finding options for which your business can qualify. Grants often come with more involved application processes, so it might not solve your timing issue. But because they’re essentially free money, applying can benefit your business in the long run.
• SBA loans: SBA-backed loans lower the risk for lenders, enabling them to offer lower interest rates and longer repayment timelines. That said, applying for and getting an SBA loan can take 30 to 90 days.

Bottom line

A business bridge loan can be a useful tool — but it’s also a risky one. You should only use this form of financing if you’re extremely confident you can repay it or replace it with financing that has a lower interest rate and a less aggressive repayment timeline. Otherwise, you may risk entering a cycle of debt, which can be difficult to recover from. Before agreeing to a bridge loan, be sure to explore financing options available to your business and review the loan agreement carefully.

Frequently asked questions

• How does a bridge loan work for a business?

  A bridge business loan bridges a money gap for a company, usually as they wait for other financing to be approved. You might use it to buy an office space with a plan to replace the bridge loan with your commercial real estate loan once it goes through, for example.

• What are the risks of a bridge loan?

  Bridge loans come with high interest rates and short repayment timelines. They’re a risky move unless you’re extremely confident you can replace the bridge loan with a more advantageous type of financing in the near future.

• What credit score do you need for a bridge loan?

  While you’ll generally need good credit to qualify for most bridge loans, some lenders will accept a credit score as low as 600 but may require collateral or a personal guarantee to secure the loan.