It’s important to choose the right type of financing for business ventures. Often, things aren’t black and white when it comes to loans. There’s not really a “right” or “wrong” loan for business acquisitions or other needs. Instead, you have to decide which type of funding helps you meet your current goals. This applies to traditional loans as well as alternative funding such as bridge loans.
This guide answers many common questions about bridge loans and acquisitions. You can learn when, how, and why to use a hard money loan for this purpose, as well as things to avoid.
What Are Business Acquisitions?
Acquisitions can refer to many things in the world of business. In this article, we use the term in a few ways:
- Buying a competing business
- Acquiring assets from another business, such as equipment or inventory
- Purchasing a franchise location
- Expanding operations by acquiring a small business in a new location
- Obtaining another company’s customer lists
- Buying part of your own business from a partner
What Financing Options Are Available for Acquisitions?
Small businesses can apply for SBA financing from the Small Business Administration. Many types of conventional loans can also cover business expansion, buyouts, and acquisitions.
The downside of all of these options is that they have strict requirements for business owners. You have to meet qualifications related to credit score, years in business, annual revenue, cash flow, and financial documents. Many conventional loans also require substantial collateral.
The other option is to go the route of alternative financing. Bridge loans are one of our most popular types of alternative loans. Depending on the size of the transaction, you can also utilize invoice financing or merchant cash advance programs for acquisitions.
What Are the Advantages of Bridge Loans?
Bridge loans are a type of asset-based lending. They’re also called hard money loans. They provide funding based on the value of an asset, such as real estate, inventory, equipment, or something similar. Bridge loans offer many benefits:
- Faster approval: You don’t need to provide or fill out endless documents to qualify for a bridge loan. There’s no need to show years of tax returns or balance sheets. This saves a lot of time during the qualification and closing phases. Instead of waiting months for approval, you can get funded in a few weeks.
- Greater flexibility: Traditional loans often come with a huge list of prohibitions. It can be frustrating to have to get bank approval for every little thing. Bridge loans don’t have any of those strings attached.
- Lower requirements: Unlike the strict requirements of SBA loans and other traditional funding, the qualifications for bridge loans are comfortable for small business owners. Even companies with past credit issues or less-than-ideal annual revenue can qualify. The main thing that matters is the value of the asset you use as collateral.
These advantages can be amazing for business acquisitions.
What Are the Downsides of Bridge Financing?
As mentioned at the beginning, there’s no right or wrong type of financing for all situations. Bridge loans can be a powerful, flexible and amazing tool with tons of pros, but they also have some cons you need to be aware of.
For one thing, the interest rates on bridge loans are higher than with traditional financing. Hard money loans also have shorter terms for repayment. They’re designed exclusively as short-term financing.
When Are Bridge Loans a Smart Choice for Business Acquisitions?
If you can qualify for a low-interest, long-term loan option such as an SBA loan, that should be your first choice to save money. When you have to close quickly on great opportunities, however, bridge loans are a better choice. Choose asset-based lending when you need speed and flexibility to complete the transaction.
At the same time, make sure you have sufficient funds on hand (or as a result of selling acquired business assets, such as inventory) to pay off the bridge loan quickly. You can also transfer the balance to a long-term loan once it clears, combining speed and savings. Only businesses that have good credit scores should attempt this, however.
At HML Solutions, we care about your business. Let our financial advisors show you ways to save money and get financing quickly with our bridge and hard money loans.