If you're running a small business, chances are you'll need some loans to help you out along the way. Loans vary widely on what they can be used for and how long you have to pay them off, and often these factors depend on what you need to use them for and how much you need to take out. One of these types of loans is a bridge loan, which is merely a loan with relatively short terms (often 90 days to three years) used to fill in a temporary gap in cash flow for an organization. Here are three ways you can use them for your small business.
1. Startup Expenses
One of the reasons entrepreneurs take out short term loans is to fund the cost of starting a business. Maybe you thought you had enough to get started until you found out that you needed to move out of your garage and into an office space, or maybe you haven't started yet and just need some capital to help you get the supplies and materials you need to get going. Either way, bridge loans can be used to help you get your business off the ground. You'll just need to show that you have a viable business plan or are already operating successfully. Banks want to know their money will be used well and that you have a realistic plan and proven track record of paying them back. Be ready to pay some interest on the money you take out, but this is worth it if it means your startup can become a viable company.
2. Temporary and Emergency Operational Costs
If you need to stock up on inventory or increase the number of people you hire before a busy season, this is another time you may want to take out a bridge loan. Even when you know you'll make the money you need to cover those costs, it can be tough to front that money in the early years of business. Taking out a small loan will give you the cash you need to make those investments. This is also a good method for paying for emergency parts or repairs for equipment. A loan like this can help you pay for the repair itself or for a full replacement, if needed. If you're replacing your equipment, banks tend to approve those loans relatively easily, since the equipment itself acts as collateral. Just make sure you're buying machinery that will last beyond the end of your loan terms so that you don't end up having to pay off a broken piece of equipment.
3. Cash Flow Needs
Say your business has several outstanding orders that you're waiting on receiving the payment for. You know you're going to receive the money, you just don't have it in hand yet. At the same time, you just purchased more inventory items, so much of your cash is tied up in that, and now your bills are due. As a small business, you don't have enough liquid cash on hand to handle all of those expenses, but you know you will as soon as you get the money for those orders. This is another situation where bridge loans can come in handy. Banks know that cash flow can come in cycles, so they're often willing to give you a loan for that short period of time between needing the money and getting those checks in the mail. This is especially true if you can show them your sales receipts that you're waiting on payment for.
As a small business, taking out a bridge loan can be one of the smartest things you can do. If you know you can pay it off quickly and completely, they may just be what you need to stay afloat or launch your company into the next growth phase. Do your research to find the best options for you and your business, and then take advantage of this opportunity.