Loans are incredibly useful when you know how to customize them to your needs. Of course, to do that, first, you need to know all of the options available to you. Some decisions involve changing certain details of loan terms, and others are more wide-ranging, such as selecting the type of loan that’s a good fit for your goals. Bridge loans can be an amazing tool for small businesses as long as you know the right way to use them.
What Is Bridge Financing?
Bridge loans are supposed to do what the name sounds like: bridge the short-term financial needs of your company. There are several reasons why you would want this to happen.
Funds for Inventory
One example is when your business is running short of working capital for an important purchase, such as inventory. A bridge loan could help you get enough money to buy all of the inventory you need. This short-term loan is designed to be paid back quickly, so you would use the profit from inventory sales and customer billing to cover the costs. In a way, a bridge loan is like front-loading your revenue, spending money ahead of time to make money afterward.
Financing for Real Estate
Real estate businesses frequently use bridge financing in a similar way. Few house flippers and investors have all of the money needed to purchase property in their savings accounts. They need to get a loan to complete the purchase, but that’s when they run into a snag: Traditional loans take too long to get approved. Rather than waiting months and potentially having the real estate get scooped up by another party, house flippers use bridge loans.
They can get funding to buy real estate, pay for improvements, hire subcontractors and handle remodeling. Afterward, the property goes on the market. With the funds from the sale (or from the previous sale in the case of large real estate businesses), the company can pay off the bridge loan and have plenty of profit on the side.
What Are the Advantages of Bridge Loans?
Some of the benefits of bridge financing have been touched on already, such as approval speed. It only takes a few days or weeks to get approved and receive funds. Also, these loans cover things that traditional mortgages usually don’t, including renovation costs for broken-down properties. Last but not least, bridge financing has simple requirements that many small businesses can meet comfortably, even ones that have had credit problems before.