Being a business owner, you may have felt the need of some additional fund/capital in between of an on going project. This mostly happens in those business where payment is received in instalments or at the end of the project such as in case of construction and real estate business. In this case what happen is due to post payments the owners lack with fund for completion of the project. This situation forces the business owners to borrow from investors or here the other option they opt for is going for a business Loan from Banks and NBFCs.
What are Bridge Loans?
Bridge loans are a type of gap financing arrangement. Which provides you capital to fulfil your cash crunches on a temporary basis as the tenure of a Bridge Loan is low as compared to any other loan.
Description: Bridge loan helps in bridging the gap between a short-term cash requirement and long-term loan. This loan is normally given from a minimum of one year tenure to a maximum of two year tenure. These loans are generally lent at higher interest rates and normally require some asset in the form of collateral or security like equity.
A bridge loan allows a company to accept investor’s check at terms that will be decided later. Until the terms for the equity deal can be hammered out, the money is considered as a borrowed one (loan) to the company and earns interest on it. Bridge loans from investors leave the equity deal open to future investors. The hope is that those future investors, such as private equity groups, will have more expertise at negotiating such things.
In brief, a Bridge Loan is a promise from the borrower to an investor to convert borrowed money into company stock at a price which will be determined later. This loan “bridges” the time between when the company/organisation needs the money and when it can establish a fair stock price and valuation with professional investors or even with Bank.
Bridge loans are the short-term loans given meanwhile normally at higher rate of interest to the borrower who are pending a more permanent arrangement. This loan help those businessmen who are facing cash crunches and have a guaranteed source from where they can get fund in near future. It can be their client or it can be sum due payments which they are going to receive soon.
Benefits of a Bridge Loan
- Size: Any business which goes for a Bridge Loan gets small funding either from a bank or from an investor which help them a lot to grow at the time when they are in need of it. It help them to survive in the market beside this it help them to flourish.
- Value: Bridge Loans can help you grow your business and to increase the company’s worth before the equity is sold out.
- Secure In Nature: This Loan is secured in nature. The security is given in the form of any asset (property). The lender has the authority to take over the ownership of the collateral in case the borrower is not able to repay the loan. This reduces the risk factor of the lenders hence, they are ready to lend easily
- Flexibility: Because they are essentially a simple agreement between the company owner and the lender, the borrower will not face any kind of complication which they may face when they borrow from any relative/ friends or with other money lenders.
For what purposes can a Bridge Loan be availed?
Equipment are the most important thing needed to work and complete a project. If you are a company owner and you have a good project in your hand. You have the manpower and all whatever is required for the project except the equipment. Think yourself you will be able to complete the project on time? Certainly No. At this point of time Bridge Loan can be used to buy the equipment’s. This way you can complete the project/assignment.
Use of a Bridge Loan for the purchase of inventory will guarantee a business owner that he/she is having a full stock so to complete the desired project. Running out of inventory can halt the progress you’re making which you are making in our business. So, don’t take this risk!
Paying your Staff
Keeping your staff happy is very important for completion of any project as the project completely depends on their work. You can’t afford to be late with their payment! If you don’t have enough money to pay your staff there is no hope that your project will be completed on time. Bridge Loan helps you in situation like this. It gives you money for a short tenure when you need it.
You can have big Projects
When you go for a Bridge Loan then you can take big projects. Taking a bridge loan provides you capital when the project is going on and you lack with fund. Anyhow at the end of the project you are going to get money. So, from that you can repay the loan easily. This helps your business to flourish and extend.
All these benefits cannot undermine the risks involved. There are risks to excessively forceful Bridge Loans. Specifically, if a future value round never happens, the borrower might be stuck reimbursing a huge credit. Make sure you are borrowing for right reasons.