When a business owner or manager are under the gun trying to get financing in place for some need where there is some sort of official or self imposed time limit in place, one option to consider to get the capital you need is through bridge loan financing.
A bridge loan by definition is a loan for a specific purpose that will be repaid by a certain time or event in the future. The more predictable and verifiable the reliable the repayment plan, the more likely that a bridge loan can be arranged.
The most common use of bridge loan financing is when there is a gap between two ends of a transactional event with respect to time and capital is required to facilitate the transaction. In these cases, the capital is required to start the transaction and the completion of the transaction will pay back the bridge loan.
Regardless of how compelling or verifiable or predictable the exit strategy or repayment strategy for the bridge loan is, there is considerable risk of loss present in most of these situations.
As a result, the cost of financing can be much higher than what you would expect for traditional business financing. In fact, for some deals, the bridge financier may expect that you split the profit margin of the transaction with them as compensation for the money being advanced and the risk being taken.
While the effective financing rates in these scenarios may seem extreme as a result, the alternative may be to not do the deal at all at which point 50% of the potential profit is better than 0%.
A typical bridge financing arrangement that occurs every day is with the buying and selling of residential or commercial real estate. The borrower has purchased a new property and is trying to sell an old property at the same time, creating the need to utilize the equity in the old property to help finance the new property through a short term bridge loan. This is a very low risk transaction in most cases and as a result the relative cost is much lower than other bridge loan transactions.
The key to bridge loan financing though is the exit strategy. The more certain the repayment plan is, the more lenders will be interested in the deal and as a result, the lower the cost of borrowing will be.