The Ultimate Guide To Bridge Financing – Pros And Cons

Business organizations face many financial ordeals during their journey. They may need immediate funding to meet specific business requirements. Long-term finance from investors may take time to convert. The solution for quick and instant monetary help lies in bridge financing. It is an ideal way to raise ready cash for your business.

Bridge Financing, also known as bridge loans, is a short-term loan. The loan term ranges between six and twelve months. Bridge financing is useful when a business faces low funds and a cash flow crunch. Although it comes with high interest, it can help until you receive a long-term loan from venture capitalists, private equity investors, and the likes.

Bridge financing provides quick funds to business owners in times of urgent financial need. This type of financing makes the fund available within a short period to fulfill the immediate monetary requirement. It helps you buy time until you arrange a long-term loan.

Types Of Bridge Financing

1. IPO Bridge Financing

Whenever a company invests in IPO (Initial Public Offering), they can use the IPO bridge financing before investing to cover all the expenses which will come along with the IPO. The company pays off the loan after it raised money from its IPO.

2. Debt Bridge Financing

Debt bridge financing is a high-interest loan given for a brief time. In times of urgency, companies can avail of this type of financing.

3. Open Bridge Financing

As the name suggests, the time frame allotted to these loans is not time-bound, and hence, it is not an efficient funding method for businesses.

4. Closed Bridge Financing

Under the closed bridge financing method, you and the lender fix a time frame for the loan under a legal contract, thus ensuring efficient utilization of funds.

Pros Of Bridge Financing

1. Bridge financing is one of the quickest, instant, and fastest methods of obtaining funds during any urgent need or cash crunch position for any company.
2. Bridge financing can also be a tool for giving the credit score of any company a good shape. A company with a bad credit profile can make some damage control by timely paying off bridge loans in a short period.
3. Bridge financing is a great support system to fall back on for companies who plan to implement and execute business ideas quickly with its quick funding process.
4. Bridge financing also provides the investors with flexible repaying options within a specific time frame, thus giving better credit profiles and future long-term loan possibilities.
5. Bridge financing helps keep up falling businesses that are on the verge of insolvency with its quick funds.

Cons Of Bridge Financing

1. As quick as it is, bridge financing comes with very high-interest rates, which may become a hazard for a company to pay off within the specific time frame.
2. With high-interest rates, cases of high default risks may also occur for the borrowers where some may not repay and fall under a defaulter category.
3. Several bridge financing lenders may also levy exorbitant amount penalties in case of late repayment situations by the borrowers.
4. Also, as the unpaid loans accumulate for the borrower, it keeps disturbing their credit profiles, affecting their future long-term loans.
5. The drawback of bridge financing is where a borrower cannot exit this cycle and eventually switch to traditional loan systems.

The various factors of any company may determine whether they should invest in bridge loan guide to bridge financing may help many investors before considering investing in bridge loans.

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