How to Use Bridge Loans to Increase Working Capital
Did you know the term bridge loan doesn’t specify just one kind of financial product? There are a variety of structures and options to choose from. What makes this type of loan is the purpose—when you borrow bridge money, you’re getting financing for a gap in your cash flow caused by an unexpected or immediate expense. Depending on exactly what kind of bridge you need, the structures will vary to meet your business cycle. For instance, if you’re financing a property purchase and you need a bridge to close and renovate before refinancing into a long-term product, you won’t necessarily want the same payment plan as if you’re taking a hard money advance to buy inventory.
That brings us to using a bridge loan to access working capital. For this to work, you need to make sure you’re applying for an unsecured loan. Secured loans are tied to purchases, which means they have restrictions on the way you can use the capital. Unsecured loans tend to provide working capital you can use toward a purchase or another goal without restriction. For unsecured bridge loans, hard money loans are the most common resource offered. That’s good, because their costs are predictable and the approval process is fast, so they are there for you when you need financing and don’t have time to wait.
Hard money loans come with higher interest rates than other forms of financing, but they also give you the ability to get a large amount of working capital quickly. Depending on the structure of this kind of bridge loan, you might make a few large payments to satisfy the balance in equal installments or you might make interest-only payments with a large balance due at the end of the loan. Either way, you can count on some monthly overhead and that means financing to have the working capital to make those payments, not just enough to cover your current expenses.
When you have an opportunity to take a business deal that requires a little extra funding and make a windfall profit that could set the tone for your whole financial year, the extra costs associated with these loan types are hardly noticeable because they are a drop in the bucket next to the possible returns if the deal is executed correctly, and the speed of delivery is one of the things you buy when you take out a bridge loan. The key to making sure you get the return you expect is knowing when you need this kind of financing and when your regular pool of credit sources and working capital will cover you.