The Basics of Bridge Loan Financing
Not all loans are long-term financing solutions. There are also short-term financing options that can cover small, medium, and large purchases. One of the most popular options for short-term financing needs is called bridge loans. How can they help your business?
Why Is Short-Term Financing Important?
First of all, why would a potential homeowner or business owner look into short-term financing? There are several reasons.
For one thing, long-term financing tends to take a while to get approved. If lenders have to wait 20 or 30 years for a loan to get repaid, they need to evaluate the applicant’s finances carefully. This includes credit history, cash flow, time in business, and other requirements. It’s not surprising that conventional term loans can take several weeks or over a month to get approved.
On the other hand, short-term financing such as bridge loans can get approved relatively quickly. The shorter terms mean the risk is less, and interest rates are somewhat higher than with a long-term loan.
For a person trying to close on an important piece of property, a few weeks can make all the difference in the world. With a bridge loan, you can sign on the dotted line before another buyer comes along and snatches up your dream home or business location.
Another benefit of bridge financing is that the credit score requirement generally is lower than with conventional financing. This is especially true for asset-based loans. Also known as hard money loans, this type of financing is based on the value of the collateral provided by the business or individual. Some types of collateral used include inventory, vehicles, construction equipment, or even jewelry.
How Can You Use Bridge Loans Correctly?
To have success with a bridge loan, you need to see it for what it is: short-term financing. The interest rates are higher than with term loans, but that’s not really an obstacle if you use the loan correctly. Of course, you wouldn’t want to keep paying those interest rates for 20 years, but the objective is to get the financing you need for a short time only.
Many business owners use bridge financing to get capital to complete large purchases while waiting for other loans to go through. For example, they may have applied for a large loan for construction equipment, but they need the equipment right away. In that case, a bridge loan works great until the low-interest financing gets approved. When used in this way, bridge financing is an incredible tool.