Many businesses face temporary cash flow gaps between securing new funding rounds or while waiting to complete a major deal. Bridge loans act as short-term financing to help cover these gaps. This article outlines the essential steps for obtaining bridge financing from lenders.
What Are Bridge Loans?
A bridge loan is a short-term loan that provides temporary financing until additional funding is secured. These loans "bridge the gap" between regular funding rounds or major business deals.
Typical situations where companies utilise bridge financing include:
- Investment: Waiting for the next investment round
- Assets: Before major assets are sold
- Exit: Prior to an IPO or acquisition
- Expansion: During the expansion, long-term loans
Bridge loans typically have terms of less than one year, with some lasting only a few months. They are intended to be repaid once the anticipated funding or transaction is completed, helping businesses meet immediate cash needs during transitional periods.
How to Get a Bridge Loan: Step-By-Step Process
To help you navigate this journey confidently, here’s a straightforward, step-by-step guide on how to get a bridge loan:
Step 1 - Determine If You Qualify
As bridge loans are riskier than traditional financing, lending companies have strict eligibility requirements:
- Timeline of Business: Established for two years or more
- Revenue: Consistent revenue streams
- Cashflow: Strong cash flows
- Collateral: Assets for collateral
- Credit History: Stable credit history
- Repayment: Realistic plans to pay off the loan
Be prepared to provide financial records like bank statements, tax returns, profit and loss statements, and cash flow projections. Having detailed business plans will also help demonstrate that you have a viable way to repay the loan.
Step 2 - Choose the Type of Bridge Loan
There are several main types of bridge loans, each with advantages and disadvantages to consider.
- Closed Bridge Loans: These loans have a fixed repayment deadline, often within 12 months, and a clear exit strategy—such as a planned property sale or securing long-term financing. The defined terms may result in more favourable rates compared to open bridge loans, as the lender's risk is reduced. However, penalties may apply to borrowers if they default on the pre-determined repayment schedule.
- Open Bridge Loans: These loans offer more flexibility, as they do not have a fixed repayment date. However, this increased flexibility comes at a higher cost - open bridging loans usually carry higher interest rates because lenders take on greater risk without a guaranteed payback schedule. In some cases, lenders may deduct interest upfront from the loan amount provided. Borrowers often choose open bridge loans when facing financial constraints and uncertainty about exactly when they can repay.
- First Charge Bridge Loans: These loans are when the lender holds the primary claim on the collateral put up for the loan, meaning they stand to recover their money before any other lenders in case of a default. Since these loans provide greater security to the first-charge bridge lender, they often come with lower interest rates compared to second-charge loans.
- Second Charge Bridge Loans: These loans refer to when the lender holds a secondary claim on the borrower's collateral, ranking behind the primary lender. If the borrower defaults, the first lender gets repaid first, and the second lender receives any remaining funds available. This type of financing can be useful when a borrower needs additional funds beyond an existing secured loan.
Carefully consider which loan type best aligns with your situation and terms you can manage.
Step 3 - Find a Reputable Lending Company
Thoroughly research multiple financial institutions and alternative lenders that offer bridge financing. Look for these positive characteristics:
- Willingness: Willingness to fund your particular situation
- Experience: Experience working with companies like yours
- Speed: Quick loan decision turnarounds
- Pricing: Competitive pricing and terms
- Reputation: Strong customer service reputation
A reputable loan provider will take the time to understand your business and needs.
Step 4 - Submit Your Bridge Loan Application
After selecting the right financial institution, it's time to submit the application. Be prepared to provide:
- A business plan - Details on company history, financials, projections
- Use of funds - Exact use of capital from the bridge loan
- Collateral - Personal or business assets to secure the loan
- Ownership structure - Details on investors and shareholders
- Management team/staff credentials - Backgrounds of key personnel
- Repayment plan - Strategies for repaying on time
- Necessary know your customer (KYC) documents
Also, clearly outline the loan amount needed and proposed terms that suit your repayment abilities. Many lenders have quick online applications.
Step 5 - Get Pre-Approved
Going through the pre-approval process gives you an accurate idea of rates, fees, and loan amounts for which you'll qualify. Typical items checked during pre-approval are:
- Credit: Credit history and scores
- Income: Income streams and outstanding debts
- Collateral: Collateral appraisals if assets are involved
Pre-approval typically takes a few days and gives you a clearer understanding of your potential loan terms. Note that pre-approval is not a guarantee of final approval, which depends on further due diligence and documentation.
Step 6 - Finalise Closing & Reporting
You are in the final stage. Ultimately, you will:
- Sign: Review and sign loan agreements
- Documents: Provide additional documents if requested
- Payment: Pay any upfront fees
- Loan: Receive loan disbursement
Don't forget that with bridge loans, you will need to provide regular updates on business developments so the lender can monitor repayment viability.
Conclusion
This outlines the key bridge loan steps in obtaining fast bridge financing, from evaluating qualifications to signing on the dotted line. Keeping lenders closely updated, having a solid repayment plan, and maintaining positive cash flows are vital for successfully utilising these short-term, tactical loans. With the right preparations, bridge loans allow companies to bridge financial gaps while pursuing milestone transactions and investments crucial for growth.
