The money lending business in Singapore has undergone a drastic change in the last decade. There are now multiple avenues for financing in the loan market today and one such avenue is bridge loans. Small businesses often face a funding gap while financing their venture. Even if you have been bootstrapping your business with your own money, there comes a time when a business owner has to get a loan. This could be to purchase a new piece of equipment, or paying off your creditors, acquisitions, and mergers for the business. Whatever your reasons may be, bridging loans can help expedite business transactions without taking traditional loans.
Now, many of us don’t know what exactly a bridge loan is or what kind of purpose does it serve and how does it differ from other traditional loans offered by banks? This post will provide you with a brief idea about bridge loans and how startups and new businesses can apply for one if they need it.
What is a bridge loan?
A bridge loan is a short-term loan that helps provide a steady cash flow to fulfill current obligations before one can secure permanent financing. It is a short-term, high-interest loan that offers quick cash for individual and commercial needs. When it comes to financing, businesses often face a funding gap between long-term loans like a new round of investment coming through or a situation where the current mortgage on the office premises is due, and the company hasn’t found a new mortgage to pay off the current loan. In scenarios like these, businesses can make use of bridge loans to pay off their current mortgage. As the name suggests, bridge loans help “bridge the gap” between one period of funding to another, more permanent source of funding.
For example, a company has been approved for a $500,000 loan from the DBS bank. However, this money would not be available for another 6 months, and the company is running short on cash. In this case, the company can apply for a 6-month bridge loan of $50,000 to cover its expenses until the loan money is approved.
Bridge loans are also known by many other names like gap financing, swing loans, interim financing, etc. It is crucial to understand what bridge loans are before opting for one. Bridge loans have a short-term maturity and need to be paid off within a year or less.
Things to look out for while getting a bridge loan
The bridge loan market is not as simple as one might think. In fact, there exists a wide variety of lenders tempting you to look for the lowest bridge loan rates. The fact of the matter is, loan rates vary as per the market conditions and one’s individual situation. There are several factors to take into consideration while looking for a bridge loan lender like:
- Loan Terms:
When it comes to securing gap financing for your business, the gap is as crucial as the financing itself. The amount of time between your company’s long-term funding varies greatly depending on the origin of that funding. The pre-terms and conditions for bridge loans are usually a lot shorter than traditional loans which range anywhere from six months to a year. Most money lenders in Singapore have prepayment penalties, so one needs to ensure a right term length while securing a bridge loan to utilize your funds effectively.
- Loan Amount:
One surely doesn’t need a million dollars to get their business to the next level. In fact, most businesses try to borrow as little as they can to suffice their operational needs and to save on overhead costs. The amount of funding that you may need depends on the type of project you have planned, and that amount varies greatly from borrower to borrower. Lenders often offer a wide range of loan amount to fit the needs of any given project. While searching for a lender, you can look for lenders as per the budget decided for your project. This will help you narrow down the choices and options available to you.
- Approval of loans:
Lenders have various kinds of resources at their disposal. Most of the times, lenders have a tie-up with banks and private investors to provide interim financing to borrowers. The amount of funding your business obtains, depends mostly on the banks and investors behind the lending company and therefore as such, the approval times may also vary accordingly. The basic turnaround time for a bridge loan to get approved stands at 7-10 days. The specific time for a loan approval depends on the company’s processes and policies and also upon the details furnished by you like how you plan on utilizing the said funds being provided to you, and how you plan on returning the money. If you pay attention to the company’s advertised turnaround times and provide complete information to the lender, your business can make sure that it gets the necessary funding as per your need and requirement for funds.
- Higher interest rates:
Bridge loans have higher interest rates than regular loans. Such loans have an expedited underwriting and a different due diligence process needed to speed-up funding to help the business owners cover their funding requirements. As there is relatively less due diligence involved, the lender is taking more risk here as they can’t fully vet the business and its owners as thoroughly as conventional lenders usually do. As the entire process is shortened with less financial documentation, the lenders are in a way exposing themselves to increased risk and when the risk to the lender’s increases, the cost of financing is bound to go up as well which in turn leaves the borrower with a higher cost of borrowing.
- Both Secured and Unsecured:
Some bridge lenders require their loans to be secured by hard and personal assets. Bridge lenders involved with commercial real estate use actual real estate as a collateralized security. There are also some lenders who secure the loan with the help of the borrower’s business equipment and machinery while some use unpaid invoices and accounts receivable. But, however, the practices of the lenders may be, an unsecured business lender doesn’t need any actual collaterals to provide financing such as FS Bolt, an app that allows you to get a working loan up to SGD 100k without any form of collaterals.
Securing A Bridge Loan in Singapore
Business owners today can opt for bridge loans via banks and private money lenders such as Funding Societies. With the startup market booming in the country, there are now more options available business owners seeking bridge loans. Given below is a list of three different sources apart from commercial banks and traditional bridge lenders that a business owner can use to procure bridge loans:
- Loan by a factor:
A factor is a financial intermediary that is involved in purchasing receivables from a company. A factor can also help out in your bridge loan endeavour, a firm that agrees to provide front-end cash on specific accounts receivable that meets the credit requirements on the part of the borrower of the loan. The factor in such scenarios usually furnishes 50 to 70% of the face value of the invoices upfront with the remaining balance paid to the entrepreneur at the collection date of the receivables. The factor, however, charges a hefty fee and interest on such transactions.
- Loan by equity investors:
This might be an alternative unknown to many business owners, but equity investors are also an open channel to seek bridge loans. If a major equity funding deal is pending final logistics until its closure, then a funding group can also advance short-term bridge loans in advance of the closing on the stock purchase. This is more in the form of a convertible note that is entitled to pay the lender interest or some combination of interest and principal during the brief duration of the bridge period (no principal amount is due until the long-term equity deal is closed). The conversion feature is in the form of a call option that allows the lender an option to have the loan paid off or roll the loan into an additional equity stake in the business.
- Loan from individual investors:
What if a business has an urgent requirement to pay off the bills and the future equity deal is not coming from one capital funding source but various individual angel investors? One can still arrange for a bridge loan instead of the company’s aggregate capital that is coming within a few months from individual investors. The business owner, in this case, can utilize a letter of intent (LOI) to get the bridge loan. Such a deal requires the bridge loan originators to meet face to face with the angel investors to confirm their signatures and the terms of the LOI. The relative strength of the LOI is enough in cases like these to secure a bridge loan.
Another option is to apply for a business loan through FS Bolt, an app that specialises in giving working loans of up to SGD 100k to SMEs within 24 hours. Business owners can download the app here and apply for the business loan within 2 minutes. Approval takes 2 hours and disbursement of funds takes 24 hours.
Bridge loans are critical to small businesses with a limited budget. The Singaporean startup ecosystem has gone through massive changes within the last 5 years and now stands in favour of new up and coming ventures. In a time when markets are fluctuating, and the need to bridge gaps is constantly growing, lenders offering bridge loans is on a steady rise in the country. One particular example is the mobile application FS Bolt app, allowing business owners to apply for a working loan that can help in their financial situations.
Funding Societies has a Capital Market Services License issued by the Monetary Authority of Singapore. Capital Markets Services License No: CMS100572-1 issued by Monetary Authority of Singapore (2016)