Cash is the lifeblood of any business. When cash is not flowing, a business can die. That is the simple, often brutal reality. Sooner or later, every business will need a little cash infusion to maintain the flow. For example, temporary cash shortfalls might occur when there is a delay in pending receivables or the signing of a long-term financing package. Regardless of the reason, these short-term cash flow issues need to be dealt with in a timely fashion.
Many businesses turn to bridge loans when quick financing is needed. Bridge loans are short-term funding measures that “bridge” the gap between today’s immediate need for cash and the later receipt of income or more long-term financing. Banks, investors, and other lending institutions understand the needs of businesses, and offer bridge loans every day, but they can get complicated.
One simple alternative to a bridge loan that business owners often fail to consider is to leverage their personal portable luxury assets, like old diamond jewelry, gold bullion coins, or valuable timepieces. Diamond Estate Jewelry Buyers has helped many businesses obtain immediate cash loans with their precious collateral. Our small business loans can easily convert luxury assets such as a Tiffany diamond ring or Rolex Submariner into the funds you need until longer term financing can be secured.
However, to help you make the best decision for your financial situation, we’ll take a look at some of the main issues involved when trying to secure a traditional bridge loan for your business.
Finding a Lender or Investor for a Business Bridge Loan
One of the biggest challenges in securing bridge financing for a business is simply finding a lender or investor willing to take a risk on your business. Banks, investors, and lending institutions may understand the short-term needs of your business, but you will have to provide them with assurances that their investment is in good hands.
If your business has a solid earnings history, that alone may be enough to convince a lender to extend a bridge loan. You’ll need to show your excellent credit history, consistent profitability, and strong sales numbers. A business demonstrating all these attributes may be able to convince the lender of its ability to repay the loan in a short period of time.
If your company’s earnings history isn’t up to the rigorous standards described above, you will most likely have to offer collateral to secure a bridge loan for your business. Collateral can be in the form of real estate, business or manufacturing equipment, accounts receivable, and sometimes even the personal and capital assets of the business’s founders.
While providing collateral will give banks and investors incentive to underwrite the loan, remember that whatever collateral you use can be seized in the event that you are unable to repay the loan. Obviously this presents a tremendous risk, and should be carefully considered.
Probably the biggest concern a lending institution will have when making a bridge loan is the probability that your future funding will come through, so you’ll have to make a strong case for the upcoming transaction. And make sure that your bridge is long enough to get you to the other side.
It is critical that the size of the loan is sufficient to get your business to the more permanent funding you are bridging to. If you think it will take three months to secure future financing, you should probably try to make your ‘bridge’ last six months. Getting a second bridge loan is even harder than getting the first one.
Business Bridge Loan Terms
Business bridge loans can also feature other terms designed to let the lender profit from the increased risk inherent in the loan. Since business bridge loans are usually sought in tough times and require immediate action, borrowers have minimal leverage, and the terms can be harsh. Typical business bridge loans are short-term notes, with a maturity period of one to nine months and an interest rate that can range from seven to twelve percent.
The bank or investor may also place certain restrictions on your business, like prohibiting any large investment, or mandating cost cutting measures to reduce expenses. Some investors will also charge an origination fee of one to two percent of the loan amount as compensation for structuring the deal.
Warrant Coverage in Business Bridge Loans
A warrant is much like a stock option, in that it allows the holder to purchase a company’s stock at a specific price at a specific date. One of the terms in a business bridge loan is called “warrant coverage”. This refers to the percentage of the amount invested that the lender can purchase in the company’s stock.
For instance, if you are borrowing $75,000 and there is 100 percent warrant coverage, the investor can purchase up to $75,000 of the company’s stock. These percentages can be negotiated, but expect warrant coverage of at least 50 percent. In some situations, warrant coverage can exceed 100 percent.
Factors in Business Bridge Loans
Another kind of bridge financing is called “factoring”. In this case, a financial intermediary (i.e. factor) agrees to purchase receivables from your company, paying you the value of the invoice, less commission and fees. The factor advances 75 to 80 percent of the invoiced amount to your company immediately, and the remainder when they receive the balance from the invoiced party.
These kinds of bridge loans can be expensive, with factors charging two to six percent of the invoice amount. Factoring is typically used in businesses where long receivables are part of the regular business cycle, or when companies are growing rapidly and need cash to take advantage of a new business opportunity. Because the factor is more concerned with the credit rating of the invoiced party than your business, these types of loans can often be obtained even if your business does not have a pristine credit rating.
If you would like to determine how much short term business financing you can secure with your diamond jewelry, gold, or valuable timepiece, please contact Diamond Estate Jewelry Buyers today for a free collateral loan consultation and appraisal of your item(s).
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Are you wondering about the financing options available for businesses with bad credit or no credit? Please check our article: How to Get a Business Loan with Bad Credit