Business owners know how crucial it is to find a favorable restaurant or store location. However, securing and confirming the sale can only happen after handing the down payment to the property manager.
Fortunately, you can take out a bridging loan to take care of the initial payment while you look for more permanent and long-term funding. A bridge loan, also known as a caveat or swing loan, is a type of financing that’s used by most entrepreneurs to take advantage of business opportunities that present themselves.
Here’s how bridging loans can benefit your business:
1. Quick access to cash
The primary advantage of bridging loans is that they offer business owners quick access to cash. This is particularly helpful when you need to purchase stock for your store, but you don’t have the funds available because a client hasn’t paid you yet.
Typically, though, this type of loan is used by entrepreneurs to grab a real estate investment opportunity such as a great deal on a property to build a second branch. The funds are used to secure the transaction. You can either pay off your debt quickly or refinance it with longer-term funding.
Most bridging loans offer fast application, approval, and funding. But these may come at the cost of hefty interest rates.
Nonetheless, you can still take advantage of this setup by knowing:
- How much you need – Calculate the exact amount you must acquire to complete a business transaction. This way, you can prepare for the repayment.
- When you can pay off the loan – Bridging loans are named as such because they’re intended to provide funds temporarily while you’re still waiting for approval on a longer-term financing application.
- What your alternatives are – You also have to consider other means of repayment because you may be imposed with hefty penalties if you can’t pay within the specified due date. Make sure that you are capable of refinancing your bridging loan if the budget is tight.
- What the different fees are – Be mindful of the various costs that come along with taking out this kind of loan, including arrangement, exit, repayment, legal, and valuation fees, which may take a percentage of the principal amount.
2. No monthly repayments
As mentioned above, you only have two options in paying off your bridging loan debt. You can repay it within the specified due date, which usually lasts between two weeks and three years, or look for an extended loan period.
You aren’t required to make monthly repayments with this type of loan, which is ideal for small businesses. For your personal finances, bridging loans can be an alternative to taking out a mortgage, although you have to consider the payment schedule.
3. Flexible options
Bridging loans can be used to finance any type of business transaction. You can even use it to purchase undervalued properties without a deposit, as well as buy ones that are ineligible for other borrowing methods, like uninhabitable structures.
There are two types of bridging loans:
- Open – This arrangement has no set end date, which means that you can repay your debt when able. They’re typically more expensive than closed bridging loans.
- Closed – This one has a fixed end date, typically a few weeks or months. You take out this type of loan when you know when funds will become available for repayment.
4. Prepayment incentives
You can easily find bridging loans with prepayment incentives. Amortizing loans typically allow you to save money on interest by paying your debt early. With some, like commercial bridge loans with a factor rate, you can enjoy fixed interest, as well as ask for a prepayment discount.
Ultimately, you should look for a loan that enables you to save money when you pay it off quickly. If there’s a penalty when you repay before the intended due, which is called prepayment risk, it may not be worth going ahead.
However, eliminating all your debts as quickly as possible is a wise business tactic to keep your company financially healthy. That’s why you should study the terms of potential bridging loans.
Conclusion
Bridging loans can benefit your business by providing quick access to cash when you need them to purchase more stock while awaiting payment on sold items. Typically, the arrangement is used for real estate opportunities, such as funds for down payments on an excellent property deal.
Other advantages include not having to pay monthly repayments, giving you a choice to get a loan with a set end date or not, as well as enjoying prepayment incentives with the right plan.
