When bridge financing comes up in conversation, many business owners and managers think of short-term real estate funding. Bridge loans are popular with CRE investors because they support a quick close on property while awaiting traditional financing to come through. While that is a powerful tool for business owners and investors in hot markets and for fix-and-flip developers looking for redevelopment funding, bridge financing is more flexible than you might think.
Bridge loans can cover any type of funding gap a business is experiencing. This article will touch on some of the many ways bridge financing works as a solution for small businesses operating in today’s economy.
If you’re unfamiliar with the term “bridge financing,” here’s a quick primer. Bridge financing is a short-term financial solution that often comes from an investment bank or venture capital firm. It allows a business to solidify its short-term position until long-term funding is available. Bridge financing can be easily replaced with another loan or paid off when cash flow increases.
Although bridge financing may have higher interest rates than traditional loans, it can be approved quickly and paid down quickly. Terms max out at just a few years, which means borrowers aren’t paying interest for a decade or more. They’ll also get a credit boost when they pay off the loan. Plus, bridge financing is highly customizable and flexible. If you have a reliable broker, bridge financing can open a world of possibilities for your business.
Contractors
As a contractor, it’s common to deliver a job before the client has paid the full cost agreed upon in the purchase order or contract. The contractor has expended its capital on supplies, materials, and payroll and needs to recover those costs. For a small business, it may take that payment to fund the company’s outlay for the next job. The longer it waits, the more business it stands to lose.
With bridge financing, the contractor can continue to accept new jobs while they await payments. The bridge financing pays for equipment, materials, and labor to eliminate any pauses in workflow and cash flow. The bridge loan can be satisfied when the payments come in from completed jobs. Contractors aren’t the only ones who can benefit from bridge financing. Any time a business has a gap in funds between conducting work and receiving payments, a bridge loan can fill the gap.
Hospitality
To remain competitive, hospitality-focused properties like hotels and resorts, business owners frequently are required to complete a Property Improvement Plans or PIP to maintain the “flag” or brand affiliation with their hotel. These provide the funding needed to increase the property’s asset value with improvements like bringing features into compliance with ADA laws, installing sustainability measures, and modernizing to capitalize on new security tech.
The COVID pandemic hit the hospitality industry hard. In recognition of this hardship, many leading brands postponed property improvement requirements. Now, brands are expecting owners and operators to complete the upgrades to maintain their hotel affiliation, but with interest rate changes, many hoteliers face challenges being financed. A bridge loan provides the funds necessary to complete upgrades while owners await decreases in interest rates and a more favorable long-term financing horizon. This strategy offers an extension of sorts on improvement financing.
Innovation
Taking new product and service developments from idea to implementation represents many hours of hard work and dedicated resources. After launch and marketing, there is inevitably a lull before that hard work pays off in terms of cash flow. During that gap in the launch cycle, short-term bridge funding becomes an indispensable business tool.
The company’s innovative work could make it a household name, but that won’t happen if it can’t cover operational costs in the meantime. Until it can reap the rewards of all its hard work, the company can use a bridge loan to keep operations running smoothly.
Going Public
Businesses may seek funding from venture capitalists when they want equity financing instead of debt financing. In this scenario, the business is preparing to go public and offer its shares on the market. Bridge funding could be utilized to complete a merger, or finish a phase of product or service development prior to offer.
Bridge funding can be beneficial if the outcomes are worth greater than the cost of money, but when poorly handled, bridge funding can overly dilute the value of the public offer, making investors hesitant. For that reason, bridge funding is often applied sparingly and between rounds of funding prior to public offering. When applied correctly, bridge funding allows venture-backed businesses to surge ahead, allowing them to quickly capture market share.
Refinancing
Last year, the Federal Reserve hiked up the Prime Rate, which, in turn, affects loan interest rates. Companies that sourced CRE loans during the heady years of 3% interest rates are seeing those loans come due now. For those looking to refinance those loans, interest rates on new term financing won’t be as favorable as in the past. It could be in their best interest to hold off on refinancing until rates come back down.
For this short-term gap, bridge loans offer a viable solution. The business can use the bridge loan to satisfy its CRE loan. Then, they can hold the bridge loan until rates drop on new term financing. Once the company transitions to the new loan, the bridge loan has served its purpose.
If you’re intrigued by what bridge loans can offer, there’s no one in a better position to help you discover if a bridge loan is right for you than a broker. Since bridge loans are so flexible, your broker can customize it until you’re satisfied it fits with your planning. It’s always a good idea to consult with a broker before making the move to refinancing, gap financing, or investment financing. Reach out to our team as you consider business financing. Let’s see what kind of financing we can source for you.