Xan Myburgh is the CEO + Co-Founder of Backd Business Funding, a leading alternative financing solution.
In the current market environment, with equity valuations deflating and traditional banks tightening their purse strings, many companies are struggling to find financing. That’s why some businesses—especially those in high-growth phases—are increasingly turning to alternative financing options instead of traditional bank debt or equity raises.
Enter bridge loans. These short-term funding solutions are designed for immediate, temporary financing needs. Typically taken out for anywhere from a few weeks to a few years, bridge loans offer a faster approval process and can help bridge the gap until larger or longer-term financing is available. Due to their short-term nature and higher risk, they usually have higher interest rates and interest-only payments. This makes them appealing to businesses that need quick funding and can’t wait for—or don’t qualify for—traditional bank loans.
We have noticed a trend toward bridge loans lately from our brokers and even from VC firms that are looking to find a way to bridge cash-flow gaps. Anyone considering a bridge loan should keep in mind that their temporary nature impacts the strategic planning of companies and investors who use them.
Benefits Of Bridge Loans
Bridge loans can be useful for companies in a high-growth phase that are struggling to raise equity capital or obtain traditional bank financing. In these cases, companies are often spending a lot on things like hiring and building up their business or trying new strategies that might not always work. Low profitability and low liquidity and interest coverage ratios aren’t appealing to traditional banks, making bridge loans a good option.
Bridge loans can be approved and funded much more quickly, sometimes within the span of a few days, compared to the weeks or months a traditional loan can take. The application process is more streamlined and requires less paperwork. Collateral requirements are often more flexible and lenders are often more willing to work with customers that don’t fit traditional lending criteria. That said, they can be ideal for many situations that require quick funding, such as real estate, where they can cover the period between buying a new property and selling an old one. In that case, either property might be used as collateral.
Done correctly, bridge loans can build trust and strengthen the relationship between a company and its investors. They are non-dilutive, meaning they provide cash to a company without investors having to buy more shares, which can be expensive and complicated and drive down the share value. This can make investors feel more confident about a company’s ability to handle financial challenges creatively and responsibly.
Bridge loans can also help maintain operational continuity during critical growth phases. They can provide a financial cushion to take advantage of time-sensitive opportunities such as acquiring a competitor or launching a new product line, where the delays of traditional financing can be a problem.
Due Diligence
When considering a bridge loan, diligence and careful planning are key. It’s important that a company and its investors are aligned to ensure the decision makes sense for both sides. Everyone needs to be confident the costs don’t outweigh the benefits and that the loan can be reliably repaid.
Having a specific use case in mind is critical. Bridge loans should be used for specific, strategic purposes instead of simply to have more cash on hand. On the other hand, moving into a high growth or high revenue phase where you need more inventory is a solid reason.
While bridge loans can be a valuable tool, they should be part of a broader, carefully-considered financial strategy. Companies should see them as a stepping stone toward more sustainable long-term financing rather than a recurring solution.
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