What Are Bridge Loans and What Can They Be Used For?
As a business owner, you may occasionally find yourself needing some additional cash to get you through the next big project or to purchase a piece of new equipment. You may not be eligible for a conventional business loan, but yet you can’t afford to miss out on the next step. With bridge loans, you have a financing option that can temporarily fix your capital crisis.
What is it?
These loans meet short-term cash requirements but without the long-term payment requirements of conventional lending. These loans usually have one to two year tenure plans. They often have higher interest rates than traditional bank lending, and they may require some form of collateral or security before approving a loan application.
There are different ways of acquiring bridge loans, and one is through an investor. The loan, in essence, is a promise that any investor can convert the borrowed amount into company stock at a competitive price down the road. The funds bridge the gap between when the company actually needs the money and the period of time when they will have a fair price established for their stocks and valuation with a bank or other investors.
What are the benefits?
You can grow your business. By using the financing to invest in operations or expansions, you can grow your business and create additional revenue. You can survive in the market and increase your company’s worth. Also, the loan is secure. The security for the loan is from an asset, and the lender is able to assume control if you can’t repay the debt. This reduces risk and makes a lender more willing to invest in your venture.
How can it be used?
Bridge loans can be used to purchase new equipment or be used to replace old or broken machinery. You can use the funds for a strategic marketing campaign designed to increase your customer base. You have the money to hire the labor needed for big project or bring on seasonal help when orders have you scrambling. You can also use the loan to stock up on inventory and be ready for the influx of business you anticipate with your campaigns and extra efforts.
As with any financing assistance, there are risks inherent to borrowing from investors. Be cautious as you negotiate the terms of a bridge loan, keeping your business needs at the front of every decision.