Financial terms don’t need to be complicated. Every business owner can understand the basics of loans to help their company. Bridge financing may seem intimidating at first, but it’s pretty simple once you know why it’s helpful. This article will explain the most important parts of bridge loans in easy-to-understand language.

What Is Bridge Financing?

Bridge loans are a type of short-term loan. Like other loans, they give you money that you need to pay back with interest. Some loans give you up to 25 years to pay back the capital. With bridge loans, businesses usually have about six months to one year to pay back the loan. That’s why it’s short-term financing only.

Bridge loans are also called asset-based loans. To qualify, you usually need to provide some type of collateral, or guarantee, that you’re going to pay back the money. Collateral includes business assets such as equipment, real estate or inventory. The collateral you choose is up to you; the higher the value of the item, the larger the loan you can qualify for.

Why Do Businesses Use Bridge Financing?

Some companies turn to bridge loans because they need to get capital quickly. For example, there may be a large discount on inventory prices that you want to take advantage of. With flexible financing, you can buy the inventory right away and save money thanks to the sale.

Other businesses use bridge loans because they help with their available capital. This is especially important for companies that sell products to other businesses. Wholesalers, resellers, distributors and other B2B companies sometimes run out of money to buy more inventory because their customers take longer than 60 or 90 days to pay. A bridge loan can provide working capital while you’re waiting for your clients to pay.

What Are the Advantages of Bridge Loans?

One advantage of bridge loans is that qualifying is easier than with traditional business loans. Your credit score doesn’t need to be perfect. Having collateral also means that the application is simpler to fill out. You may not even need to provide financial documents such as balance sheets.

Another benefit is speed. Bridge loans only take about a week for approval. That’s amazing compared to conventional loans that require three or four weeks to go through.

What Are the Downsides of Bridge Loans?

Compared to long-term loans, bridge financing costs more. Interest rates are higher. To keep costs down, you should try to pay off the loan as soon as possible, preferably in two or three months.