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There may come a time in the life of your small business when you will need a short-term loan. To prepare yourself for that time, it can be useful to know what types of loans might be available to you under various circumstances. Here, we take a look at three of them.
What Is a Bridge Loan?
Let’s say your company is working with investors to obtain funding for expanding your small business. The deals are in place, but your funding from them won’t be available until six months in the future. In the meantime, you have payroll and other office expenses to take care of. In other words, you need to keep your business afloat while you wait for your investors to come through. The answer to your conundrum could be a bridge loan.
A bridge loan is a short-term loan that businesses or individuals can use to provide themselves with the funding they need while more conventional sources of long-term funding are pending or not yet available.
For instance, homeowners can use bridge funding to bridge the gap so they can purchase a new home while waiting for their old home to sell. Generally, a bridge loan is fairly easy and quick to obtain. However, bridge loans can be costlier than more conventional funding. Additionally, lenders generally make a bridge loan available only as a short-term loan.
DIP Financing Is A Type of Short-Term Loan
DIP stands for “debtor in possession,” and it refers to financing that can be made available to businesses that are going through the process of a Chapter 11 bankruptcy. Under US law, a Chapter 11 bankruptcy allows a company time to reorganize and restructure its debt. However, during this reorganization phase, the company must continue operating in order to emerge from the process in a way that allows them to repay their creditors.
For this reason, under strict supervision by the bankruptcy court, post-bankruptcy lenders provide cash in the form of short-term loans. The loans cover operating expenses for the business that’s undergoing bankruptcy. These lenders are given a senior position on liens, generally with the consent of the existing lenders. The existing lenders give their consent because they understand that the business needs time and capital to reposition itself so it can eventually repay its debts to them.
DIP financing, also called “debt financing,” can be a lifeline for a business that’s struggling to get back on its feet again after bankruptcy proceedings.
Would Purchase Order Financing Help Your Company?
Purchase order financing is business-related financing that allows a company to use a purchase order from a client as collateral for a short-term loan.
The reasons a business might turn to purchase order financing are varied, but generally, a company would use this type of financing to purchase materials for a large job. With purchase order financing, the lender bases their credit decision on the financial situation of the client who placed the purchase order, instead of on the company that is requesting the loan. The lender then charges a fee to the company that is requesting the loan.
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Purchase order financing can allow a smaller company to take on larger projects than they otherwise could take on. Meanwhile, it doesn’t add debt to the company’s balance sheet, and it ensures the company can complete the job on time. A company can usually obtain this type of short-term loan fairly quickly.
Consider a Short-Term Loan to Help You Achieve Your Goals
Whether your business is going through a rough patch or has an opportunity to expand and grow, there are various types of short-term loans that can help you achieve your goals.