The Ultimate Guide to Bridge Loans During the COVID-19 Epidemic
March 25, 2020
March 25, 2020
As of May 28, 2021, the Paycheck Protection Program has run out of funding. You can learn more about the PPP with our COVID-19 resource hub.
Bridge Loans During the COVID-19 Crisis will require some special considerations. A bridge loan, also known as bridge financing or gap financing, is a short-term loan that can last anywhere from a few weeks to a month. This short-term financing solution is typically utilized to form a â€śbridgeâ€ť between more traditional loans to keep operations flowing smoothly and effectively.
With the onset of the coronavirus as a global pandemic, and the increasingly negative toll itâ€™s been taking on the United States economy, many small business owners have found themselves worried about the financial stability of their companies. Weâ€™re taking an in-depth look at bridge loans, and how they can be utilized to shore up small business finances during a time of need.
Getting bridge loans during the COVID-19 crisis will be challenging until the government loan programs can be formalized. Finding long-term financing with favorable terms that make sense for your businessâ€™ financial needs can take time, particularly with large purchases which your business needs to or wants to capitalize on quickly. Banks can take months to review all of your businessâ€™ information and come to a decision. Bridge loans are designed to fill the gap.
Scenarios in which a bridge loan can come in handy include commercial real estate purchases, which often require businesses to act quickly in order to take advantage of the opportunity before another interested buyer does, inventory and equipment purchases, and acquisitions. In these scenarios, a business can take out a short-term loan and then refinance the value once they have settled on a longer-term loan. They can also be used to shore up cash flow for a short period of time, which will be the main focus during the coronavirus epidemic.
It is important to note that bridge loans often come with higher interest rates on account of their duration, which gives lenders less time to make money. However, depending on the situation, the benefits can offset the negatives, and rates can be very reasonable for businesses with a strong credit history and track record.
Bridge loans come with both amortized and non-amortizing repayment terms.
With an amortized bridge loan, your business will be required to pay fixed, monthly payment towards the loan. When the loan term ends, you will have paid off the entire loan.
With an non-amortizing bridge loan, you will only be responsible for interest payments each month. Then, at the end of the loan, you will be required to pay off the value of the loan in one lump sum, often referred to as a balloon payment. This latter option may be particularly useful for businesses facing decreased revenues during the early to middle stages of the coronavirus downturn. However, non-amortizing loans also require greater planning, as you will need to make sure you can make the final balloon payment.
With businesses being forced to shutter or significantly scale back day-to-day operations as the United States attempts to curve the impact of the COVID-19 virus, many small businesses, which typically operate on small margins, are faced with mounting expenses and few sources of revenue.
While it is currently unknown how long the implications of the virus will last, it is reasonable to assume the United States economy will be back up and running within six months to a year.
A bridge loan could be the key to surviving the current economic atmosphere for small businesses, enabling them to shore up cash flows, meet rent, pay employees, and smooth overall operations during what is an exceedingly difficult time.
Already, Florida Governor Ron DeSantis has activated a state program designed to provide short-term bridge loans with 0% interest rates to small businesses throughout the state. This program, which is being managed by the Florida Department of Economic Opportunity (DEO), has been allocated over $50 million.
Though this program is only available in Florida, it would not be surprising to see other states pursue similar courses of action in the coming weeks. If your business is struggling, try reaching out to your local state representatives. Putting pressure on lawmakers and informing them or your predicament can help facilitate and motivate action.
Recently, the United States Small Business Administration (SBA) has activated their Economic Injury Disaster Loan Program for California, Connecticut, Delaware, the District of Columbia, Florida, Georgia, Indiana, Maine, Massachusetts, Montana, Nevada, New Hampshire, New Jersey, New Mexico, North Carolina, Rhode Island, Utah, and Washington.
These SBA disaster loans, which are backed by the federal government, offer low-interest rates â€“ not zero-interest like the aforementioned Florida program â€“ and favorable terms, making them a strong option. However, SBA loans are often difficult to qualify for and typically require a strong financial track record. If you have a bad credit history, typically your business will need to pursue other options.
If none of these options work for your business, be sure to research options that may be available in your local community. There are a number of small-scale non-profits helping community businesses survive the storm by offering loans of their own.
Lastly, if none of these options are open to your business, you should begin the process of reaching out to traditional lenders, such as local banks. Get an idea of what the loan applications entail and how you can best position yourself to get a loan if you need one. Though they will not offer terms as favorable as state and federal programs, many will still be more than willing to lend your business money in most cases.
Rates and terms will vary based on your credit history and the lender, so be sure to review all the terms carefully to make sure the loan is a good fit for your business. Even if you donâ€™t need money at this time, since it is uncertain how long the virus will have an impact on the United States, it would be wise to begin researching options now and get the approval process started. As the old clichĂ© goes, better to be safe than sorry.
As you pursue a bridge loan, it is important to remember that some loans require personal guarantees. Loans with personal guarantees could leave you responsible for the loan amount should your business default. As such, it is important that you read the fine print for any type of funding, whether it is a short-term loan, such as a bridge loan, or a long-term loan. If a lender asks for your personal credit score, then it is a good hint that their may be some degree of personal liability involved.
If nothing works out, you can also look at pursuing a short-term loan from an alternative lender. Alternative lenders who lenders who operate outside of the traditional financing space. The aforementioned bank loans and SBA loans would be considered a more traditional financing measure. Alternative lenders are usually online businesses, and they often have far less stringent requirements compared to traditional loans. That said, they often charge higher interest rates to offset the risk they incur by lending to businesses that are unable to meet the credit history and revenue requirements of traditional banks and lenders.
The coronavirus is unique from other economic crises because of the highly contagious nature of the illness. Usually, during a tough economy, the goal is to encourage consumer spending and get the economy rolling again. With a virus like COVID-19, this is not the primary goal. Instead, in the past week for example, many restaurants have been forced to operate at half occupancy or halt dine-in operations entirely.
Americans are being advised to stay home and decrease overall activity. This means that many forms of spending â€“ particularly eating out â€“ are being actively discouraged.
Issues that small businesses can expect to face in the coming weeks and months include, but are not limited to, the following:
Without an inflow of revenues, many businesses will be strapped for cash in the coming weeks. This can impact a businessâ€™s ability to meet expenditures like payroll, rent, interest payments, mortgages, and more. This is the key issue that a bridge loan can be used to help mitigate by providing a business with working capital in a quick and timely manner.
As Americans become more nervous about the economy, their savings, and their overall financial standing, they will undoubtedly become more cautious about their use of discretionary income and more averse to making big purchases. This means that products that were popular and profitable yesterday may become obsolete.
The issues that could arise with your workers are vast, especially since labor is often one of the biggest business expenses for small companies. First, workers may become sick during the epidemic, and your business should be prepared to take precautions to ensure that they do not come to work and get other associates or customers sick. In addition, since we are entering this time of uncertainty straight out of a multi-year economic boom, you may have a large staff. As such, it is time to begin considering how you should manage your employees in the coming weeks, such as letting people go or reducing hours of operation.
Remember, this illness wonâ€™t last forever, so the key is keeping your business alive and stable in the interim. The more liquidity you can achieve with your assets during this time the better. But remember, you should analyze any potential courses of actions from two perspectives. First, will the course of action help my business in the interim? Second, will the course of action have a positive, neutral, or negative effect on the position and operational abilities of my business when the downturn ends?
As the COVID-19 virus progresses throughout the United States, we have entered what is uncharted territory for the nation. As such, it is important to be vigilant in your planning. While the situation is unfortunate, there are a number of actions that can be taken in the interim to help preserve your business. Bridge loans, among other financing options, are a great way for your business to access capital quickly in this time of need. Plus, with the number of programs that are being started by both the federal and state governments, there are a number of favorable options with low interest rates and good terms.
Overall, remember to stay positive. Times may be tough, but through proper planning and conservative, thoughtful actions, you can make sure your business is ready to prosper when better times return.