Bridge financing is simply a short term loan that helps facilitate the completion of a transaction. The term bridge is used to illustrate that what you’re trying to finance has a clear and definite beginning point and ending point.
In many cases, bridge financing is sought to complete a transaction quickly so that more suitable longer term financing can be secured over a less compressed period of time.
In other cases, a bridge is strictly used for completing a transaction whereby when the entire transaction has successfully closed, proceeds from the transactions will be used to pay back the bridge.
Conventional debt financing programs like factoring, inventory financing, purchase order financing, private mortgages, and other forms of asset based lending are basically bridge loans in disguise.
The key characteristics of most bridge loans is that they are a more expensive form of debt financing, but that they can also be put into place rather quickly and are designed to manage the risks associated with an incomplete transaction.
In order to secure a bridge, the borrower typically has to have something of value to pledge that the bridge financier would be interested. The most common form of security is real estate. A Bridge secured by real estate can potentially be used for all sorts of purposes in that if the underlying transaction or activity being funded is not successful, the lender will just realize on the real estate security.
Other forms of assets can be used to secure a bridge. In most cases, however, the lender will require possession and potentially legal control of the assets to protect their interests which is why real real estate tends to be the security of choice.
In terms of when to use a bridge, you need to go back to the earlier definition…the transaction or application of capital must have a clear beginning and ending.
If you can see clear to the other side of a transaction and all that stands in your way of a profit or ownership of a long term appreciating asset is capital, then a bridge should be considered. As long as the return potential of the transaction is greater than the cost of the bridge, a short term bridge loan may be a very shrewd financial decision.
The reasons why bridge loans aren’t considered more often is 1) individuals view them as too expensive and 2) people think that lower cost financing should be easy to come by.
There is no question that bridge financing can be pricey. This is opportunistic based lending that takes full advantage of the time pressures that cause deals to fall apart when traditional financing can’t be secured on a timely basis.
Which leads in to the second point.
Commercial financing for any type transaction that is not straight forward is almost never easy. The process can take way more time that you think and even when you get a commitment to fund, there can be several conditions that need to be met before any funds are advanced.
The notion of easy to secure financing kills more deals that you can image.
And that’s why bridge financing should always be considered either as a back up plan or as a short term form of financing that gets the deal done and buys time for you to find a more suitable longer term business finance solution.
From a cost point of view, which would you rather have? A smaller return or nothing? Most people will say they will take a smaller return if they had too, but don’t spend any time getting a bridge financing contingency in place because their so focused on getting traditional financing locked in by the deadline.
So in many cases, they end up with nothing.
Personally, I wouldn’t use bridge financing if I didn’t have to either. The trick is knowing when you need to bite the bullet and pay the piper, versus running out of time and driving your deal over a cliff.
Something to consider.