A bridge loan can seem like the perfect financing tool for your business. You only need the money short term; you have what you believe is decent collateral, and your business has a good track record of paying its bills. But all may not be as it seems. You might begin applying for bridge loans only to discover that funding is not easy to get.
Private lenders are willing to take a few more risks than banks. They are not willing to bear the entire risk of a bridge loan themselves. So they tend to be very choosy about who they lend to. They look for every indication that a particular loan might be a bad risk.
If you are having trouble securing financing for your business, consider the fact the bridge funding might not be right for your circumstances. Below are three signs indicating as much, compliments of Salt Lake City’s Actium Partners.
1. Bridge Loans Are Keeping Your Business Alive
One thing that will turn private lenders away pretty quickly is realizing that your business is relying on bridge loans to stay alive. A continual stream of bridge financing is the commercial equivalent of a consumer taking out one payday loan after another. It is an indication that a business is dealing with significant financial problems.
It is one thing to apply for a bridge loan to meet immediate financing needs while you are waiting on future revenue. But if you are continually applying for one loan to pay off a previous loan, it is evident that the future revenue you are depending on is failing to materialize.
2. Lenders Balk at Your Collateral
Bridge loans funded by private lenders are offered based on the value of the collateral being offered. If lenders are balking at the collateral you are offering, that tells you it doesn’t have the value you think it has. You may not be able to get a bridge loan if you don’t up the ante.
Not being able to put up enough collateral says one of two things. Either you are asking to borrow too much, or your existing assets do not warrant approving a bridge loan. Neither case is necessarily the end of the world, but you might be prevented from getting bridge loans until the issue is addressed.
3. Lack of a Solid Exit Strategy
Bridge loans are similar to hard money loans in the sense that lenders want to see a reasonable exit strategy. As part of your loan application, they want to see how you plan to repay the loan when due. If they are not convinced your exit strategy is solid, they may be hesitant to lend.
A good example is a bridge loan taken out in anticipation of future SBA loan funding. This is a pretty common use for bridge funding, seeing as how SBA loans can take 30 to 90 days to fund. If you have already been approved for an SBA loan and are just waiting on the process, you have a fairly solid exit plan. If you are merely hoping to get SBA funding, that’s another story.
Your lender will have to do its due diligence to determine how likely your business is to get the SBA loan you are counting on. If they do not see a path to successful SBA funding, they might also not see a path to exiting a bridge loan either. Your chances of being denied are pretty high.
If you have been struggling to get a bridge loan for your business, do any of these things apply? If so, therein lies the explanation.