What is a bridge loan? How does it work and is it right for your small business?

As a small-business owner, sometimes you need money—and fast. Bridge loans are a popular small business loan for businesses that need to bridge the gap between short-term and long-term financing. 

Bridge funding offers a quick and convenient source of funding when traditional financing may not be readily available. Small business owners use business bridge loans for various reasons, such as covering short-term cash flow issues or funding business opportunities. Let’s look at how bridge financing works and when to use it: 

How does a bridge loan work?

Business bridge loans are short-term loans that provide immediate funding for small business owners.

Businesses use bridge loans when they need immediate capital but are waiting for long-term financing, such as from a commercial real estate or business buyout loan. This type of financing can help businesses avoid cash flow disruptions and continue their operations while waiting for long-term funding. 

Lenders that offer business bridge loans include traditional banks, private lenders, and alternative lending companies. However, bridge loans vary, but usually have higher interest rates and shorter repayment periods versus traditional business loans.

Business bridge loan requirements

To apply for a business bridge loan, applicants must typically submit a loan application and provide information about the business.

While lenders will have specific requirements, you’ll generally need the following to get a business bridge loan: 

• Financial statements: You’ll need detailed financial statements, including profit and loss (P&L) statements, balance sheets, and cash flow projections.
• Collateral: To secure the loan, you may have to put up real estate, inventory, or equipment as collateral. If you fail to pay, the lender can take the asset you put up as collateral. 
• Use of funds: Lenders will likely want to see a breakdown of how you plan to use the bridge loan. You may also include this as part of your business plan.
• Exit strategy: Lenders will seek a clear plan to repay the bridge loan, often through refinancing with long-term financing, asset sale, or cash flow. 

Since bridge loans help provide temporary funding, ‌closing times matter. You can expect to close relatively fast, usually in just a few weeks.

Examples of business bridge loans

Bridge loans offer funding for a business to address immediate needs, whether it's making timely acquisitions or funding operations. They serve as a bridge—providing capital to businesses until they secure more permanent funding solutions.

Having access to immediate funds can make a significant difference if you’re trying to acquire another business or commercial real estate. But bridge loans can also help fund operations during a transitional phase. 

Key examples of bridge financing include:

• Real estate transactions: Businesses can use bridge loans in real estate to cover the gap between purchasing a new property and selling an existing one. 
• Acquisitions: Bridge financing can help with acquisitions when you need immediate funding to facilitate the transaction before securing long-term financing.
• Funding operations: Companies facing temporary cash flow shortages or awaiting a large payment may use bridge loans to cover operational expenses, payroll, or inventory purchases.

For example, seasonal businesses with fluctuations in revenue may use bridge loans to cover expenses during slow periods and repay during peak selling season. Meanwhile, companies looking to expand, launch new products, or enter new markets might use bridge loans to fund these initiatives. 

Pros and cons of bridge loans

There are both pros and cons of bridge loans. Bridge financing advantages include quick access to capital and flexibility despite higher rates.

Bridge loan advantages

Business bridge loans fill the gap in financial challenges by providing businesses with the cash flow they need to navigate through lean periods, pursue growth opportunities, or make strategic investments. 

The biggest advantages for businesses include:

• Quick access to capital: Businesses can take advantage of time-sensitive opportunities or cover unexpected expenses.
• Less stringent underwriting: Less strict requirements versus traditional bank loans, making them accessible to businesses with less-than-perfect credit. 
• Provides a bridge: Can help businesses maintain operations and cash flow during transitional periods, such as when waiting for a larger loan or investment.

Bridge loans are short-term and typically require repayment within a year. This can create financial pressure for businesses if long-term financing is not secured within the expected timeline.

Disadvantages of using bridge loans

Business bridge loans can be a risky financial strategy. The key drawbacks and risks include:

• Higher interest rates: Debt bridge funding can lead to higher interest rates due to the short-term nature of the loan.
• Dilution: Bridge loans may require issuing equity or shares like convertible securities, which can dilute existing shareholders’ ownership stake. 
• Possible loss of ownership: There is a risk of default if the business can’t secure long-term financing.

Note that if you fail to pay, you may lose ownership ‌of any collateral you put up.

Bridge loan alternatives

If the interest rate or qualifications for a bridge loan seem too strict, you may consider other short-term funding options.

Alternative business funding options to bridge loans for short-term immediate funds include:

• Merchant cash advances provide a lump sum of immediate funds in exchange for a percentage of future credit card sales, making it a quick and accessible option for short-term funding.
• Small Business Administration (SBA) loans: If you qualify, SBA loans can provide favorable terms and lower interest rates for eligible businesses.
• Invoice factoring involves selling accounts receivables at a discount to a third party in exchange for immediate cash. Invoice financing works for businesses with large amounts of outstanding invoices.
• Business lines of credit provide a revolving credit line for immediate funding needs, with the flexibility to repay and borrow as needed.

These alternatives differ from bridge loans in structure and repayment terms, and they may not require specific collateral. 

Repayment terms also vary. Bridge loans typically have a fixed repayment schedule, while cash advances, invoice factoring, and lines of credit may offer more flexible terms. 

What are your funding options?

When researching and applying for a business bridge loan, there are several factors to consider, from interest rates to repayment terms. Bridge loans are short-term and usually have a sense of urgency—it’s imperative to make informed and strategic decisions.

But as a small business owner, you have more fast and flexible funding options than you might expect. For example, business term loans like QuickBooks Term Loan can provide funding in 1-2 days with flexible terms.