In the normal course of business, both banks and business owners can face transitional situations where an immediate or short-term need for financing outstrips the capacity of either party; or alternatively, neither can provide it in the time frame required. This is the world of bridge financing, and it can be a critical element for supporting both businesses and bankers alike.
How they differ from traditional bank lenders
Bridge lenders are often managed by experienced financiers who understand business conditions and the constraints of conventional bank lenders. Typically, they lend for a period of nine to 12 months, with loan agreements that often include options to renew provided payments are met.
Other differences include:
- turnaround: often they can approve and fund new loans within four to six weeks
- approvals: there are relatively few layers of approval to go through, and discussions are usually direct with the approver
- choice: unlike traditional bank commercial lenders, there are not a large number of bridge lenders in the marketplace and they may not be universally known
- negotiating power: with a limited number of bridge lenders in the market, it limits the leverage or ability of businesses to negotiate terms
- fewer covenants: bridge loans usually require significantly fewer covenants than traditional banks, however they will often monitor the performance of the company much more closely
- lending appetite: terms and lending appetite can vary widely amongst the different lenders
Businesses can maintain liquidity until long-term financing is in place
The purpose of bridge financing is usually to meet an immediate financing need that an existing lender is not willing to meet, or to replace or complement their conventional financing. Bridge financing is temporary, and meets cash flow or working capital needs right away.
A bridge loan ends when more conventional financing is arranged, or other types of financing such as factoring of accounts receivable or the refinancing of capital assets is put in place.
Typically, growth businesses or companies going through a transition have bridge financing needs for:
- filling sales orders and keeping customers satisfied, which prevents the competition from gaining an edge
- providing time for an equity injection
- allowing time for getting back on-side with bank covenants, or replacing a lender
- allowing for an event such as an acquisition or sale of assets
- preventing a downward spiral that may arise from working capital constraints and restructuring (such as a proposal, bankruptcy, receivership or CCAA proceeding)
While bridge financing rates are typically higher than conventional rates, they can be quite cost effective in business terms relative to the business’ overall needs and the alternatives.
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