If you’re seeking funding for your small business, you may have heard about bridge lending. A bridge loan can offer cash flow in the short-term if you have costs to cover before other financing comes through. In other words, bridge loans can save a business in a pinch — whether that’s a delay in customer payment or a need to cover costs before an insurance claim comes through. In this post, we’ll answer questions you may have about this type of loan, such as what a bridge loan is exactly, how they’re typically used, their pros and cons and more.
What is a bridge loan?
A bridge loan is a type of short-term form of financing that effectively bridges the gap between the time of application and when another form of cash or funding will be available. That’s why bridging lending can also be called gap financing or interim financing. Because of their purpose, bridge loans have short terms, typically up to one year. These loans are usually secured, meaning they’re backed by collateral of some type, such as inventory or real estate. Bridge loans also generally have higher interest rates compared to traditional loans.
How are they different from traditional loans?
People typically take out a bridge loan because they need fast access to cash for a short period of time, so these lending programs are designed to provide that. Traditional loans usually have a longer approval process and almost always have a longer term. Sometimes, repayment of a bridge loan resembles that of traditional loans, with a monthly payment required. Other times, the borrower would make a lump sum interest payment at the end of the loan term. In still other cases, the interest owed is taken from the loan amount at the time of closing. As mentioned above, bridge loans also tend to be more expensive than traditional loans. Not only do they usually have higher interest rates, bridge loans also tend to have hefty origination fees, among other fees.
How does bridge lending work?
Let’s say that a business wants to buy a piece of property that’s located next to their building to expand parking spots. They won’t have the cash necessary to make the down payment on that property and pay the closing costs for another four or five months. They’re afraid that, if they wait that long to make an offer, someone else will snap up this prime piece of real estate. The solution can be a bridging loan. This business could take out a bridge loan by using the equity in their current building to fund the purchase of the new property. This type of loan can also combine the mortgage of both of these properties, at least in the short term, so the business only needs to manage one real estate loan.Then, the business would likely refinance their properties in more traditional ways, looking for an affordable long-term mortgage. Here’s a related scenario: A business may find a building that’s ideally located but the structure needs rehabbed. The owner might use a bridge loan to buy and fix up the property, and then apply for a traditional mortgage once it’s in better shape. Just like with any other type of loan, different lenders will have different lending programs. When comparing bridging loans, two aspects to consider include:
- Speed of funding: Businesses typically seek these types of loans because they have an urgent funding need. So, spread your net a bit wider and check a variety of lenders to find one that can meet your timeline.
- Incentives to prepay: This is a short-term form of funding — in other words, a temporary loan. So, ask lenders if you can receive a prepayment discount or otherwise save money by paying it off early.
Also ask each lender if they offer open or closed bridge loans. Open bridge loans don’t have hard and fast repayment dates; this offers more flexibility but may come with higher interest rates and make it more difficult to get approved. Closed loans, meanwhile, have a set payoff date and, in return, can be easier to obtain with lower interest rates.
What are the pros and cons of using bridge loans?
Pros
- Businesses can get cash fast for immediate needs.
- To facilitate the fast need for funds, the application, underwriting and funding process is typically streamlined.
- Money can be spent in flexible ways.
Cons
- Interest rates are higher than many other loan types.
- This is a secured loan with property serving as collateral.
- They often have origination fees and may also include other fees.
What are common uses for bridge loans?
Although bridge lending is often used when purchasing real estate, there are other reasons that a business may look into a bridge loan.
Delay in customer payment
Let’s say that a business offers services to other businesses (meaning it’s a B2B company), and they invoice their customers for payment. The company would then use the money paid on these invoices to cover payroll, rent, utilities and other expenses. If customers don’t pay on time, though, they still need to pay their own bills — and so they could use this type of loan to bridge their cash flow issues.
Expanding your business
A small manufacturing firm, for example, may have an opportunity to expand their services but need to buy new equipment to do so. Perhaps they’ll go to an auction to get the best pricing, which means they’d need to have funds without knowing exactly what they’ll purchase, which would make it challenging to obtain conventional financing ahead of time. Bridge lending can offer a solution in this scenario.
Insurance claims
When a business leverages bridge lending, they can use the money in ways they see fit. So, if there’s some sort of disaster (a fire, flood or tornado, for example), then a business could use the funding to take care of immediate expenses while waiting for business insurance claims to be processed.
Buying inventory
Sometimes, businesses use bridge lending services when they need to buy inventory to sell. For instance, they may need to restock their shelves after sales increased or get ready for the holiday season. The business could then pay off the loan through sales proceeds or by refinancing to another type of business loan.
What are the alternatives to using a bridge loan?
Before seeking small business funding, a business might decide to explore small business grants(assuming that time is not of the essence). Unlike with loans, these are lump sums awarded by federal, state or local governments or by private corporations that don’t need to be repaid. Sometimes, however, there are restrictions on how the funds can be used but that isn’t always the case. Other types of business loans exist, including the following:
- Business line of credit: Also called a commercial line of credit, this type of loan gives a business access to funding where interest is charged on the outstanding balance, not on the amount that’s available to use. Businesses can use the funds as needed and repay them in a revolving manner as long as they don’t exceed the approved limit.
- SBA loans: These are loans guaranteed by the U.S. Small Business Administration (SBA) and offered by certain lenders. Loan programs are available up to $5 million to cover a wide range of business needs.
- Invoice factoring: With invoice factoring, businesses can use their unpaid customer invoices as collateral. This helps B2B companies to manage their cash flow with the factoring company, which is then responsible for collecting the outstanding amount.
Looking for a small business loan without collateral? Benefits include faster approval times and no risk of assets being repossessed if payments aren’t made on time. Interest rates tend to be higher, though, and you’re still required to pay the money back, even without collateral.
The takeaway
Bridge lending can provide businesses with a fast influx of cash on a short-term basis. Business owners can leverage this funding to buy real estate, expand operations and manage cash flow, among other reasons. There are pros and cons, though, to bridging loans, such as higher interest rates. If this type of lending isn’t right for you, there are other types of small business funding to consider, including SBA loans, invoice factoring and small business loans that don’t require collateral and more. Lantern can help you explore small business loans to find the right option for you.
This article originally appeared on lanterncredit.com and was syndicated by MediaFeed.org.
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Personal Loan:
SoFi Lending Corp. (“SoFi”) operates this Personal Loan product in cooperation with Even Financial Corp. (“Even”). If you submit a loan inquiry, SoFi will deliver your information to Even, and Even will deliver to its network of lenders/partners to review to determine if you are eligible for pre-qualified or pre-approved offers. The lenders/partners receiving your information will also obtain your credit information from a credit reporting agency. If you meet one or more lender’s and/or partner’s conditions for eligibility, pre-qualified and pre-approved offers from one or more lenders/partners will be presented to you here on the Lantern website. More information about Even, the process, and its lenders/partners is described on the loan inquiry form you will reach by visiting our Personal Loans page as well as our Student Loan Refinance page. Click to learn more about Even’s Licenses and Disclosures, Terms of Service, and Privacy Policy.
Student Loan Refinance:
SoFi Lending Corp. (“SoFi”) operates this Student Loan Refinance product in cooperation with Even Financial Corp. (“Even”). If you submit a loan inquiry, SoFi will deliver your information to Even, and Even will deliver to its network of lenders/partners to review to determine if you are eligible for pre-qualified or pre-approved offers. The lender’s receiving your information will also obtain your credit information from a credit reporting agency. If you meet one or more lender’s and/or partner’s conditions for eligibility, pre-qualified and pre-approved offers from one or more lenders/partners will be presented to you here on the Lantern website. More information about Even, the process, and its lenders/partners is described on the loan inquiry form you will reach by visiting our Personal Loans page as well as our Student Loan Refinance page. Click to learn more about Even’s Licenses and Disclosures, Terms of Service, and Privacy Policy.
Student loan refinance loans offered through Lantern are private loans and do not have the debt forgiveness or repayment options that the federal loan program offers, or that may become available, including Income Based Repayment or Income Contingent Repayment or Pay as you Earn (PAYE).
Notice: Recent legislative changes have suspended all federal student loan payments and waived interest charges on federally held loans until 01/31/22. Please carefully consider these changes before refinancing federally held loans, as in doing so you will no longer qualify for these changes or other future benefits applicable to federally held loans.
Auto Loan Refinance:
Automobile refinancing loan information presented on this Lantern website is from Caribou. Auto loan refinance information presented on this Lantern site is indicative and subject to you fulfilling the lender’s requirements, including: you must meet the lender’s credit standards, the loan amount must be at least $10,000, and the vehicle is no more than 10 years old with odometer reading of no more than 125,000 miles. Loan rates and terms as presented on this Lantern site are subject to change when you reach the lender and may depend on your creditworthiness. Additional terms and conditions may apply and all terms may vary by your state of residence.
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Terms, conditions, state restrictions, and minimum loan amounts apply. Before you apply for a secured loan, we encourage you to carefully consider whether this loan type is the right choice for you. If you can’t make your payments on a secured personal loan, you could end up losing the assets you provided for collateral. Not all applicants will qualify for larger loan amounts or most favorable loan terms. Loan approval and actual loan terms depend on the ability to meet underwriting requirements (including, but not limited to, a responsible credit history, sufficient income after monthly expenses, and availability of collateral) that will vary by lender.
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Paying tax on personal loans
There are plenty of reasons to take out a personal loan, many of which are totally financially savvy. For instance, you might be thinking about consolidating high-interest debts like credit card balances.
Or you might plan to borrow in order to repair the roof or remodel the kitchen to help increase your home value. Maybe you’re considering taking out an unsecured personal loan to pay for an unexpected medical bill
https://www.sofi.com/learn/content/how-to-pay-medical-bills/
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Whatever the case, personal loans can be a useful tool to help you cover expenses and stabilize your finances. Plus, they may be easier to qualify for than other types of loans — and come with less red tape.
But as in all things finance, Uncle Sam wants his cut, too. So as you consider your borrowing options, you might wonder about how taxes work on unsecured personal loans.
For instance, you may question if a personal loan can be taxed as income and whether you can get a personal loan interest tax deduction.
If you are trying to decide between several types of financing, reviewing the potential tax implications of each borrowing option can help you figure out a financing strategy that fits your situation.
In this article, we’ll cover things you’ll likely want to know about when it comes to tax on personal loans, including whether personal loans qualify as income, and whether the interest on them is tax-deductible.
Plus, we’ll cover some scenarios that can come with tax benefits that might apply to you and your loan. This way you’ll be armed with helpful knowledge useful when making the right borrowing decisions for you.
(It is, however, important to note that we’re not tax experts. For any tax-related questions or advice, you’ll want to consult a tax accountant — and not a blog post like this one.)
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When you take out a personal loan, your lender agrees to loan you a particular amount, and you agree to pay that loan back over a set period of time with interest.
Which is actually good news on the tax front: Even though it seems like a windfall that you could be taxed on, it isn’t. Since you are agreeing to pay that money back, it does not qualify as income the way wages from a job would.
The only instance when money from a personal loan can be taxed as income is if your lender agrees to forgive the loan. Loan forgiveness can be a rare occurrence and typically occurs under the following circumstances:
- You are renegotiating the terms of a loan you are struggling to repay.
- You’re declaring bankruptcy.
- Your lender decides to stop collecting on the loan.
This is called a cancellation of debt, and it can carry tax liabilities since you’re receiving the remainder of the loan without the caveat that you’ll be paying it back.
For instance, let’s say you’ve taken out a $10,000 personal loan and have paid back $8,500 of it when the debt is forgiven or cancelled. The remaining $1,500 that you’d no longer have to pay back can be taxed as income during the year it is cancelled.
Typically, your lender will send you a tax form (a 1099-C) stating the amount cancelled, which you must subsequently report to the IRS on your tax return. Again, this is a very, very rare circumstance, so it’s nothing to count on.
Bottom line: In most situations, personal loans are not taxable as income — but if your loan is cancelled or forgiven, the remainder of the loan amount that you’ve yet to repay can be taxed the same way regular income is.
The IRS regulates which types of loans come with tax deductions. While there are some types of loans that have tax-deductible interest, unfortunately, personal loans don’t fit into that category.
The interest you pay on personal loans is not tax deductible. So if you take out a loan and pay a few hundred dollars in interest over the course of your repayment, that’s not a cost that will reduce what you owe in taxes come April.
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Although personal loan interest isn’t tax deductible, there are many other types of loans that do carry special tax benefits and interest deductions. For instance, student loan interest and mortgage and property loan interest can be deductible up to certain amounts, although there are some restrictions.
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You may deduct up to $2,500 of interest on qualified student loans or the full amount you paid during the tax year, whichever is the lesser.
However, this deduction is gradually phased out as your income increases, and is not available if you or your spouse can be claimed as a dependent on someone else’s tax return.
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In the majority of cases, you can deduct every cent of interest you pay on your home mortgage. The loan must be secured (that is, your home must be offered as collateral on the loan; this deduction will not work if you use an unsecured personal loan to cover some or all of the cost of your housing).
As of 2018, you can deduct the interest on up to $750,000 of a qualified home loan if married and filing jointly, or up to $375,000 of qualified debt for single filers. (These limits were lowered from $1 million under the Tax Cuts and Jobs Act of 2017, but if you signed your mortgage before December 16, 2017, you’re grandfathered into the previous limit.)
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Some business expenses are tax deductible, and that includes the interest you pay on loans taken out for business-related purposes. However, you can also deduct business expenses you pay for using an unsecured personal loan, which we’ll dive into a little bit more deeply in the next section.
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Although staying debt-free is standard financial advice, sometimes taking out a personal loan can be a smart money move, especially if you’re already dealing with high-interest forms of debt such as consumer credit cards.
Debt consolidation, a financial tactic that involves taking out one large loan to cover multiple smaller debts, may reduce your credit utilization ratio and potentially help you save money on interest, not to mention make your bill-paying schedule a whole lot simpler.
For example, maybe you owe $8,000 on one personal credit card and $4,500 on another credit card, both with high (and different) interest rates. With multiple bills coming due at different times of the month, chances are you’re only paying the minimum required amount on each of them, which means you’re paying them off slowly and paying a lot of interest.
However, if you were able to qualify for and take out a $12,500 personal loan at lower interest rate, you’d only have to worry about one payment date, and you might even save money on the sky-high credit card interest rates, which could simplify both your life and your finances.
Personal loans (home improvement loans) can also help you get started on major home renovations, which may increase the value of your house and help you earn back your investment in the form of equity.
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This article
originally appeared on SoFi.com and was
syndicated by MediaFeed.org.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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