Using Bridge Loans for Working Capital
Using financing to get the working capital your business needs might seem like a costly way to raise funds, but it all depends on what financing you use. Each financial product designed to inject capital into a company is built with a different business model and need in mind. Some are best used for working capital when short-term gains are in clear sight. Others reach peak cost-effectiveness when used repetitively, as a way of restructuring your cash flow. For companies looking to raise short-term working capital to be used flexibly, bridge loans are often the best option.
What Is a Business Bridge Loan?
Most forms of financing are named for their structure, like the merchant cash advance or the inventory credit line. By contrast, a bridge loan is named after its function, which is to provide a funding bridge when you need working capital. As a result, there are a lot of ways they can be structured. At their simplest, bridge loans can work like unsecured credit, providing you with a sum of capital to be payed off in amortizing installments without secured collateral. It’s expensive to finance this way, which is why most bridge loans use collateral from assets you already have, like equipment and property. Some even use business assets like inventory, invoices, or purchase orders. Occasionally, multiple assets are financed together to provide larger bridge loans that more accurately reflect your business’s value.
Uses for a Working Capital Bridge Loan
Bridge loans are not typically used to finance asset purchases because they are expensive for that purpose. Instead, they tend to be used to cover the costs needed to prepare for a major opportunity or to weather a slow period. If your business has regular seasonal slowdowns with predictable end dates, this extra capital can help you keep cash flowing easily without dipping into your reserves. Some companies also use these loans to load up on inventory ahead of predictable sales surges like major holidays. You can even use the capital to renovate or to bring in additional labor so you’re ready to take on a new project with all the resources needed to see it through. It’s a great way to finance an expansion of your services or capacity if the timing is right.
Finding the Right Bridge Loans
Since a bridge loan can be structured in many different ways, there is almost always one that works for any given business. It’s just a matter of finding the provider whose loan program and structure is designed to work for companies like yours. Once you find the right program, applying for your new loan is the next step.