Month: January 2024

A vital part of being able to run a successful business is borrowing money. Sometimes, the funds aren’t available when they’re needed. What options do you have and what is a bridge loan?

A bridge loan can provide you with financial relief to keep your business strategy on track. This article will help you learn more about this type of a short-term loan.

What is a Bridge Loan?

A bridge loan is a temporary loan designed to float a company between financing. The terms are usually short, such as one or two years.

Companies will receive a lump sum of money from the lender. In return, they’ll make monthly payments with interest until the loan is paid.

There are three qualifiers for a company to be eligible for this type of a loan:

• Loan-to-value (LTV) ratio: LTV is the value of the loan compared to the need
• Current equity: Most lenders will only bridge up to 80% LTV so a business will need 20% equity
• Debt-to-income (DTI) ratio: Divide total monthly debt payments by gross monthly revenue

A good example is if a large company is trying to secure a bridge loan to purchase a smaller company for $100 million. They can only produce $20 million so they go to a lender for $80 million.

The lender is okay with this amount because the business has current equity of 20% and the LTV is 80%.

The larger company is able to purchase the smaller company in this example. They’ll be required to pay back the loan but will be able to use assets and revenue streams from the new company for this purpose.

How do Bridge Loans Differ from Traditional Loans?

There are a couple of differences between bridge loans and traditional loans. Bridge loans are a short-term option and can be refinanced after you secure new funding. If you find new financing two months after you start a bridge loan, you can adjust the payments to a long-term option.

Most people will want to pay off the loan as soon as possible to avoid fees. Bridge loans are also quicker than traditional financing in every facet. Traditional loans for a mortgage can take weeks to process and disperse.

Bridge loans are generally processed and released within a week, and the payments you make could be delayed three to six months. Don’t forget that when you do start making payments, there will be interest attached to the amount.

What are the Pros and Cons?

As a business owner, you’ll have to decide if a bridge loan meets your needs and standards. Consider the following lists of pros and cons to determine if these loans are right for you.

Pros

• Quick: Unlike home mortgages, bridge loans are usually accessible to your business within a business week
• Repayment options: Each lender will have different options that can make a financial gap easier for you
• Short term: The loans are designed to be paid off within a couple of years at the most, leaving you with a robust free cash flow sooner than later

Cons

• High interest: Bridge loans are known to have high interest rates due to their short length
• Risky: If your future financing falls through, you could be stuck paying off a loan with high interest and fees
• Difficulty: Lenders don’t give bridge loans to just anyone

A bridge loan might seem like a quick cash option, but the high interest rates and risk might have you recalculating your need.

Many lending institutions will require you to post collateral against the loan. This might be an important asset, such as a piece of machinery or property.

Defaulting on the loan can result in the forfeiture of the collateral.

Look at the Fees

It can be easy to look at the amount you need for your business without considering any of the fees associated with obtaining the bridge loan.

With the equity you have available, set some aside to help close the loan. Here are some of the fees you might pay:

• Loan origination fee
• Title policy
• Wiring fee
• Escrow fee
• Notary fee
• Administrative fee
• Appraisal fee

Each lender will have different fees and interest rates according to the amount of money you need. The total cost of closing can run between 1.5% and 3.0% of the loan amount.

Interest rates for a bridge loan can run high. Current mortgage rates are between 3.5% and 5.5%, depending on if there are programs available.

Bridge loan interest rates are tabulated by using the prime lending percentage and adding 1% or 2% to the number. Since the prime lending percentage is set by the Federal Reserve System, it can change monthly, making your payments different every month.

Where Can I Get a Bridge Loan?

Most of your local banks and credit unions offer bridge loans, but the requirements and qualifications to get a loan can be rigorous. Many banks require you to have done previous business with them to even apply for a bridge loan.

Online bridge loan services can offer quick and easy access without going through mountains of paperwork. Save yourself the headache and stress of being denied when there are online sources to assist you.

Alternative Funding

If you don’t think bridge financing is right for your business, there might be other types of business loans available.

Check out these alternative funding options:

• SBA loans
• Business line of credit
• Borrow against equity
• Use your accounts receivable to secure a loan

The Small Business Administration (SBA) provides loans for businesses that need capital. Their criteria for the loan varies from your traditional bank. The interest rates are competitive, and the terms are favorable.

A business line of credit is another alternative source. Many lenders will offer up to $100,000 in return for higher interest rates.

A company can always trade equity for capital to fund projects or purchase assets. Many business owners are attracted to this option because there is no cash being sacrificed.

Are Bridge Loans Right for My Business?

A bridge loan can provide a lifeboat for your business until it reaches safer financial shores.

If you’re ready to secure the financial future of your business, then contact us so we can get the working capital you need.

Around 82% of businesses fail due to challenges with their cash flow management. Growing businesses should know that PO financing is a solution to cash flow shortages.

A critical part of managing your cash flow is the cycle around bringing and fulfilling new business. If you struggle to fulfill new orders coming in, it can thin out your firm’s cash inflows. On the other hand, if you do fulfill new orders but can’t collect the revenue from them in good time, you suffocate your firm.

Purchase order financing is one way you can keep the money coming in by serving customer needs, even if you don’t have the cash at hand. Here is a compact guide to purchase order PO financing to get you started.

What is Purchase Order Financing?

PO financing is a type of credit that comes from a third party to help a business fund a customer’s purchase order.

When you receive a purchase order, it can be a good news, bad news situation. The good news is that new business has come through the door. But if you don’t have the liquidity to fund that order, that becomes the bad news.

So, it would be best if you had a third party to front you the money you don’t have to fulfill your customer’s needs.

How You Can Use PO Financing

Let’s say your small business receives a significant order from a customer that your firm can’t afford to fulfill internally. You then approach a bank, but due to your less than stellar credit score, the traditional banker decides not to give you a business loan.

All the doors seem shut to you, right? Not so. PO financing companies can assist you in meeting such an order where a traditional banker balks at taking on the risk.

Once your customer makes an order, they will issue you the purchase order. The purchase order outlines all the details of the goods or service your customer requires.

Based on this purchase order, you then estimate the costs to determine if indeed, you can fulfill it. When it becomes clear that you can profitably meet the customer’s needs, the next step is to turn to a PO financing company.

Working With PO Financing Companies

Just as a traditional banker will weigh certain factors before granting you a business loan, so will PO financing companies. Some of the issues a lender considers are the creditworthiness of your customer, your supplier’s reputation, and your qualification requirements, among others.

Once the PO financing company gives you the green light, they then pay the funds directly to the supplier. While it’s possible to receive 100% financing, most PO financing companies tend to advance 80% to 90% of your order.

Your supplier can now deliver the materials you need to meet your customer’s needs. After delivering the service or product, you then invoice your customer.

When the customer pays the invoice, they will submit the funds not to you, but the PO financing company. After the lender receives the payment, they will deduct their lending fee and the principal amount before sending you the rest of the money.

When Does Purchase Order Financing Make Sense?

PO financing does not work for every type of business. Since it is a form of credit, you first need to figure out if your firm is best suited for it, as you will have to pay it back.

The funds from PO financing are best utilized to purchase supplies. Therefore, any business that needs first to procure its supplies and use them to develop and deliver a product to the customer fits nicely here.

A PO financing company will be more willing to front you the money in such a scenario, as there is less risk of you misusing it. It helps that a lender doesn’t pay the money directly to you, but your supplier, and also collects the payment from your customer.

In light of all this, you should approach PO financing as a means to an end and not a cushion for your cash flow. For the latter, a business line of credit would make more sense.

The Advantages of Working with a PO Financing Company

For the right kind of firm with the right type of business, there are tangible benefits of using PO financing. Here’s how such a form of credit can enhance your business.

1. Easier to Qualify For

If you have a low credit score that’s making it hard for traditional lenders to advance you money, PO financing lays an easier gauntlet for you. Such funding has fewer requirements for qualification, which are also less restrictive.

The purchase order often acts like the collateral backing your loan, bringing the finances within your reach.

A PO financing company is more concerned about your customer’s payment history than yours. So, if you are still building your firm’s credit and have a customer with a good reputation, you can still qualify for the funds.

2. Flexible Financing

Although PO financing is money you obtain from a third party, it’s technically not a loan. So, when your cash flow is not so robust, you can flip your purchase order for money without having to tie up your firm’s finances beyond specific orders.

Once things improve and your cash flow rebounds, you can go back to fulfilling orders in-house with no further outstanding commitments. Furthermore, in some cases, you can raise up to 100% with PO financing without pesky monthly payments waiting to hit your cash flow.

3. You Don’t Need a Personal Guarantee

When you secure a traditional business loan (or even investor funding), you typically have to offer a personal guarantee. With a personal guarantee, you are pledging personal assets in case the business can’t pay back the loan.

PO financing is structured such that if your customer is unable to pay for the goods or services you delivered, the lender will take the hit. You will not have to surrender personal assets to pay for the loan.

With that said, before you sign a PO financing agreement, it is wise to ask the lender about their policy on personal guarantees.

PO Financing Companies Help Increase Cash Flow

Cash flow is a glass ball that, once shattered, is hard to fix. One way your cash flow can suffer is when you can’t fulfill customer orders due to not having adequate cash in hand.

Purchase order financing is a kind of credit that helps you meet customer orders. This is accomplished despite your lack of financing to keep your revenue coming in and your cash flow robust.

Your FundingTree LLC helps you access better rates and customer service from banks and industry-specific lenders. Apply today for the right business funding solution for your firm.