In this article, we give you the full breakdown of bridge loans. Let’s figure out if bridge loans are a good fit for your business.
SaaS businesses are known to need financial funding in the course of their development, and growth, so the concept of a loan might not be foreign to you. “Bridge Loans”, however, might be. In this article, we give you the full breakdown of bridge loans. Let’s figure out if bridge loans are a good fit for your business.
What is a Bridge Loan?
Bridge Loan, also known as Bridge Financing or Bridge Lending, is a form of short-term loan that is required to meet certain immediate demands for your business. A bridge Loan helps you to bridge and make up for financial differences in your business to achieve the intended growth.
This form of loan helps your business finance and complete internal operations, as well as buy assets like equipment and real estate for the business. It allows you to take advantage of an opportunity that has time constraints. A bridge loan provides a cash flow for your SaaS business, but only for a short period, usually not more than 6 – 12 months, as stated in this Forbes article.
The interest that comes with it is usually more than the usual financing methods, given that it’s a short-term loan and you have to pay it back soonest.
How Does Bridge Lending Work?
Bridge lending works just like every other loan, given that you must present collateral and pay interest as it accumulates over time.
The process is the same, or similar, to other forms of loans, and the whole loan application process applies. You can also borrow a bridge loan from your banks, credit unions, or other funding methods.
The major difference(s) is that it is a short-term loan, the kind of loan you apply for if your long-term loan or funding is not on deck and you need to meet a financial requirement for your business. Also, the interest rate is some points higher than the other regular loans, an incentive that encourages the lender to pay up on time.
What Types of Bridge Loans are There?
There are four main types of bridge loans, and they include:
- Open Bridging Loan
- Closed Bridging Loan
- First Charge Bridging Loan
- Second Charge Bridging Loan
Open Bridging Loan:
This is a form of bridging where the borrower has no fixed date for the loan’s payback. An open bridging loan is preferable to borrowers (companies) without an idea of when their long-term/permanent financing would surface. Open bridging loans are not readily acceptable by lenders because of the risk that comes with them.
Closed Bridging Loan:
A closed bridging loan, on the other hand, has a fixed payback date that is already agreed upon by both the borrower and the lender. This form of loan is more attractive to lenders because there is a sure payback protocol, and thus, it has a low risk.
First Charge Bridging Loan:
This loan is applicable when a borrower has more than one lender. The principle of this loan allows this lender a claim and the right to get paid first before the other lenders.
Second Charge Bridging Loan:
Like the first charge bridging loan, this form of loan is also applicable when a borrower has more than one lender. However, instead of being the first lender to get paid, this lender would be the second.
All money borrowed, with interest, has to be paid to the first lender completely before this lender is paid.
How Much Does a Bridge Loan Cost?
As we mentioned earlier, the interest paid on bridge loans is higher than the regular commercial loans. While commercial loans have an interest that ranges between 1.2% to 12%, bridge loans have an interest rate that varies between 6% to 15%.
If the bridge loan is paid back in less time, the interest rate might not have that much significance, but the more time you take to pay it back, the more the interest accumulates.
When is a Good Time to Use a Bridge Loan for a SaaS Business?
With all views considered, no time is a good time for a SaaS business to take on a bridge loan. A SaaS business should secure permanent/long-term funding for its business as this would ensure the business’s growth in the long run.
However, if the long-term funding is not in place yet, and the business needs to take advantage of an opportunity, maybe a discounted asset for the company, the SaaS business can consider using a bridge loan. However, it is not advised for cases other than this.
What are the Pros and Cons of Bridge Loans?
A significant benefit of a bridge loan is that it serves as a source of emergency fund / temporary cash flow, especially when there is an opportunity that your business cannot just let go. It allows you to access opportunities before it passes you by.
Another benefit of bridge loans is that it helps you bridge the difference between your finances and your business needs. This ensures that you don’t halt any internal operations in your business just because you are short of funds.
A major disadvantage to bridge loans would be the high-interest rate. Bridge loans are meant to be short-term loans, and as a result, the lenders place a high-interest rate on them to make up for a short time.
What is a Good Alternative to Bridge Lending?
One of the reasons that your business would resort to bridge lending is its immediate need for cash. These are other alternatives to bridge lending:
Recurring Revenue Financing:
Recurring revenue financing helps you access your business’ recurring revenue faster without waiting on your existing customers. Capital partners like intrepidfinance.io provide you with capital based on your recurring revenue, and in return, you pay them back when the recurring revenue from your customers is available.