Bridge Capital Factoring: 4 Strong Alternatives to Bridge Financing
If you run your own business, you know how stressful it can be to worry about covering expenses when traditional loan applications are denied or delayed, or you’re between rounds of investor funding. Mentally calculating cash inflows and outflows can make it hard to sleep at night. We get it — we’re entrepreneurs too, and we understand what it’s like to see a funding gap and know that you have to find a solution. That’s why we’ve created a guide to alternative finance and our ultimate cash flow guide. So small business owners like you can find the funding your business needs without the headaches.
If you need fast access to working capital to cover cash flow gaps in your business, bridge capital factoring may be a solution. Sometimes known as gap financing, swing loan, or interim financing, bridge financing can help cover unexpected expenses or allow you to make payroll or purchase supplies.
In this blog post, we’ll look at alternatives to bridge financing, including what bridge capital factoring is along with the advantages and disadvantages of bridge capital factoring (aka invoice factoring). Hopefully, we’ll help you have a better idea of which alternatives to bridge financing are best suited to your business needs.
What Is Bridge Finance?
Bridge financing, also known as bridge capital or business bridge financing, is a short-term funding option that helps you cover your expenses until more traditional long-term funding can be secured. You might also use bridge financing when you’re waiting for a customer to pay on lengthy net terms. It helps to literally bridge the gap between rounds of investor funding, when loan applications or business lines of credit are denied or delayed, or during an IPO. Bridge capital financing is often used to purchase assets, cover operating costs, and take advantage of timely investments such as purchasing supplies at a favorable rate or taking on new opportunities that can help your business grow.
Business bridge financing may come in the form of a bridge loan or equity financing from a venture capital firm or investment bank. Traditional bridge financing isn’t the only way to cover a funding gap, as many financial institutions provide business funding. However, it’s in your best interest to compare all your funding options, including the alternatives to bridge financing.
In the same way, bridge loans are not for everyday use. They’re designed to function as a short-term line of credit. For example, they allow you to make a real estate purchase while still owning your current property.
The classic example is that you’re close to selling your existing property and have found the perfect new property to buy. You know you’ll have the funds soon, but you need access to that money now, so that you can buy your new property before selling the old one.
For businesses, and startups in particular, a bridge loan is often used to bridge two injections of investment by VCs or Angel Investors. In both cases, the loan allows you to bridge two separate periods of healthy cash flow and complete any purchase you need to make in the interim. But what’s the cost of this financial flexibility?
Advantages of Bridge Financing
Bridge financing can provide you with quick access to working capital while helping to avoid costly drops or delays in operations. Many businesses need bridge financing of some kind at some point. Here are some of the advantages of bridge financing:
• Timely Access to Capital: Bridge financing provides you with much-needed capital quickly, allowing you to cover IPO costs, take advantage of opportunities as they arise, cover expenses like payroll, and keep operations running smoothly without interruption.
• Faster Qualification than Traditional Bank Financing: Bridge financing is often faster to qualify for than traditional bank loans or business lines of credit. It’s not unheard of for banks to take weeks or even months to make a funding decision! Bridge financing gives you fast access to cash when your business needs it most.
• Increased Cash Flow: Bridge financing can provide your business with a quick cash injection, enabling you to take advantage of new opportunities and make necessary investments in your business.
• Fewer Missed Opportunities: By taking out bridge financing, you can ensure your business is able to take on new projects and opportunities, avoiding costly delays or having to turn down investment opportunities.
• Access to Expertise: Bridge financing can sometimes come with access to experienced advisors who can offer guidance and advice on how best to use the capital and make investments that will ensure the success of your business in the long term.
• Peace of Mind. Finally — and we’d argue, most importantly — bridge financing gives you peace of mind that your funding needs are covered. Not having enough cash on hand can be super stressful (we know!) and financing solutions, including bridge capital factoring, can help provide peace of mind that your business’ financial obligations will be met until you can secure long-term funding, or, invoice payments start coming in.
Bridge Finance Disadvantages
Despite the many advantages, there are some drawbacks to traditional bridge financing that you should be aware of before deciding whether or not to utilize this form of short-term funding or look for alternatives to bridge financing. Here are some of the disadvantages of bridge financing:
• Short-Term Solution: Bridge financing is typically short-term, meaning that you may have to take out additional financing in the future if your traditional long-term funding still does not come through or investor rounds don’t close. Your payments will also be higher than a long-term business loan as you have a shorter period of time in which to repay the original financing amount.
• High Interest Rates: Bridge financing often has higher interest rates than traditional bank loans, making it more expensive in the long run.
• Repayment Challenges: Repaying bridge financing can be challenging, as it requires you to have the resources to repay the loan quickly. This can be difficult for a lot of small businesses as they may not have established a steady stream of cash flow.
• Costly Penalties: Some bridge financing options might have pre-payment penalties — meaning that if you try to back by the funding sooner than the original terms, you could be charged an additional fee.
• Requires Collateral: Most lenders require some form of collateral before they will approve bridge financing, meaning that you must be willing to put up assets (business and/or personal) as security in order to access the capital. This can be risky, and may not be feasible for many small businesses.
Alternatives to Bridge Financing
Fortunately, there are other alternatives to bridge financing that can fill a short-term funding gap. These include:
1. Bridge Capital Factoring
Bridge capital factoring (also known as invoice factoring) it is a form of short-term financing in which a business sells its invoices or accounts receivable to a factoring company for a fee. This provides you with an immediate cash injection and eliminates the need for conventional bank loans or equity financing. By selling your outstanding invoices to a factoring company, you shorten your accounts receivable cycles, allowing you to pay suppliers and cover business expenses without having to wait for your customers to pay their outstanding invoices. This can be particularly useful if your business lacks access to traditional forms of bridge financing. Additionally, since the factoring company takes on the responsibility of collecting payments from your customers, you no longer have to spend valuable time and resources on collections, or lose sleep worrying about late payments.
From our many years of experience helping small business clients across North America looking for funding — bridge financing or otherwise — the ease and flexibility are what make bridge capital factoring make sense for so many businesses. But just as important, it makes sense for themselves. Our small business owner, CEO, or finance lead clients end up spending less time solving cash flow problems and more time getting back to running and growing their companies. They have peace of mind knowing they can access funding any time they need it. We’re not saying bridge capital factoring is always the answer, but it’s worth considering as you go compare your bridge financing options.
- Quick access to funds: Bridge capital factoring provides you with quick access to capital that can be used to fund operations, purchase supplies, and more. These applications are approved much more quickly than traditional bank financing. Once your account is set up, funding requests are often approved in a matter of days, giving you a convenient source of reliable funding.
- Flexible funding: You can request a boost of funding on short notice any time. (With FundThrough in particular, flexibility means no minimum funding obligation every month, no long-term commitment after the invoice is paid, no need to fund every invoice, and unlimited funding based on how much you invoice. All of this gives you the funding you need, when you need it.)
- Debt-free: Invoice factoring is not a loan. Here’s how it works: a bridge capital factoring company purchases your outstanding invoices, and gives you cash (minus a small fee or factoring rate). The factoring company then waits for payment from your customer according to the original terms. It’s basically an advance for work you’ve already completed and are waiting to be paid for.
- Non-dilutive funding. Unlike equity financing, bridge capital factoring does not require you to give up a portion of your business. You remain in control of your company.
- Credit history doesn’t matter: Unlike traditional financing options, invoice factoring depends on the creditworthiness of your customers, not you. This means that even if your business has bad credit or minimal credit history, you can still qualify for funding!
- Easy process: Banks take time to review and approve your application, and you might not have time to wait if you’re in a situation where you need bridge financing. The approval process is faster and easier for bridge capital factoring. At FundThrough, automation, AI, and accounting integration with QuickBooks make it especially easy to get funded.
- Customer contact required: The factoring company has to work with your customers to redirect their payment and verify invoices. This can understandably worry some business owners. We understand how hard you’ve worked to get these client relationships, and the wrong company can damage them. We take your trust very seriously, which is why we treat your customer like our own.
- Complicated to record in bookkeeping: Some people get intimidated by the thought of recording factoring transactions in their bookkeeping software, but once you master the basic steps it’s not that bad. Our step-by-step guide walks you through the process for how to record factoring transactions in QuickBooks. (The same basic steps also apply no matter which bookkeeping software you use).
2. Convertible Debt
Convertible debt is a form of short-term loan that can be “converted” into equity at a later date. It’s especially popular with early stage, high-growth companies, in part because it’s simpler than raising straight equity financing.
• Flexible terms: Convertible debt agreements can be tailored to the specific needs of your business, including the amount borrowed and repayment schedule.
• Potentially lower cost: Since convertible debt is often secured by equity, interest rates may be lower than other forms of financing.
• Quicker capital availability: Obtaining a business loan typically takes longer than issuing convertible debt, so you can access capital more quickly.
• Harder to secure financing: Heavy use of convertible debt can adversely affect a company’s ability to secure financing in times of economic stress.
• Higher bankruptcy risk: Convertible debt entails significantly more risk of bankruptcy than issuing preferred or common stocks. On top of that, the shorter the maturity, the greater the risk.
• Loss of control: If too much convertible debt is issued, investors may take a larger stake in the company and gain control over decision-making.
• Lack of liquidity: Since convertible debt is not publicly traded, it can be difficult to sell or transfer ownership.
• More dilution: When debt is converted to equity, ownership gets diluted.
3. Peer-to-Peer Lending
Peer-to-peer lending platforms allow you to access financing from individual investors. This can be a useful option for small businesses who may not qualify for traditional bank loans, but still need bridge financing.
•Easier to qualify: The sheer diversity offered by peer-to-peer lending networks means the likelihood of you getting funded is potentially higher than for other options.
Benefits your credit: P2P loans are reported differently than most loans when it comes to calculating credit. While most bank loans revolve loans without a fixed repayment schedule, P2P loans are more structured. This means using them adds to credit diversity, boosting your credit score.
• Quick access to funds: The process of applying for peer-to-peer lending generally takes a few minutes, and you can often have your funding within a few short hours. This speedy acquisition of capital is another marked difference between P2P lending and traditional bank or business loans.
• Flexible repayment terms: Lenders can tailor funding plans to specific needs, with terms ranging from a few months to several years.
• No collateral: You don’t need to put up any additional collateral when taking out a loan through a peer-to-peer platform.
• Higher fees and interest rates: The biggest downside to consider with peer-to-peer lending is the interest rate. This generally depends on your credit score, and can range from 7%–22%. Truthfully, this is a blessing and a curse. It means even those with bad credit can get a loan, but it also means P2P loans can be more expensive for borrowers.
• Low loan amounts: Typically, peer-to-peer loans are smaller than other financing options, and may not be enough to meet a business’s needs.
• Legislation: Some jurisdictions do not allow peer-to-peer lending or have many regulatory hoops lenders and businesses must jump through.
• Additional fees: You may have to pay additional fees to the P2P platform on top of the interest rate charged for the loan.
Grants are funds that are provided to businesses by the government or other entities with no expectation of repayment. They can be a great option if you want a business capital solution without taking on debt or diluting equity ownership.
• No repayment: Grants do not need to be repaid, so they provide an influx of capital with no strings attached.
• Encourages innovation: Since grants are often targeted at certain areas and industries, they can encourage businesses to pursue innovative projects that may not have otherwise been feasible.
• Limited availability: Grants are typically offered by government agencies, so the number of available funds may be limited.
• Highly competitive process: You’re typically competing against other applicants for grant money, making the process lengthy and difficult to predict.
• Complex application process: Most grants require a long and detailed application, which can be time-consuming and intimidating for new business owners.
• Rigid guidelines: Grants often have specific criteria that must be followed, so you might not be able to use the money as you wish.
Bridge financing can be a great option if you need short-term capital to cover expenses or fund company growth. However, there are other alternatives to bridge financing you might consider if bridge financing isn’t the right fit. For example, bridge capital factoring and peer-to-peer lending can provide fast access to capital without taking on debt, while grants can be a great source of funds with no repayment terms. Ultimately, you need to evaluate your needs and goals in order to find the best financing option for your situation.