Bridge Financing during the Slow Economy
Bridge financing is a form of temporary credit businesses can use before more permanent financing can be arranged. Bridge financing is often used for startup companies who need cash immediately to get off the ground. It can also be used to expand a business, acquire a business or even get through a period of slow profits. In a recession, bridge financing is affected along with all other forms of credit. Bridge lending is often more expensive, harder to find and less flexible when the economy is slow.
Bridge Financing Is Expensive in a Recession
During a recession, interest rates on business loans typically go up. Even as the national prime rate comes down, business loans tend to be very expensive. This is because starting new businesses or financing "failing" businesses is very risky during a slow economy. Lenders will assure themselves against this risk with higher interest rates, worse loan terms and lower loan limits.
One way to overcome this problem is to seek alternative forms of lending. Using a mezzanine loan, which is a specific equity-sharing loan from a private lender, can be a good way to overcome the cost of traditional loans. Mezzanine loans do not have a set interest rate; instead, lenders are more like investors in the business who profit from the business's success. Using private investors in the short-term can get a business through a recession.
Bridge Financing Is Harder to Secure in a Recession
Those businesses who seek bridge financing are often small, young or seasonal. These businesses are already considered very high risk. Lenders do not like to give risky loans during a recession because they have seen a high risk of default on previous risky loans. Before a recession, lenders are usually willing to extend loans fairly freely. These loans default in high numbers when the economy crashes. Lenders become risk-averse, and future borrowers will face stricter loan requirements on any new financing.
Securing a loan against an asset is one way to overcome the reluctance of lenders during a recession. You may consider using the business itself as collateral. You may also use equipment or property the business owns. While it is tempting to use personal assets, you assume a high amount of risk in doing so. Keeping your personal assets separate from the business is the best way to protect yourself from bankruptcy if the business fails.
Bridge Financing Is Less Flexible in a Recession
Financiers gain the upper hand during a recession. Because they know loans are harder to get and more expensive everywhere, they can more easily set their own terms when it comes to your loans. You have few options but to accept the terms on the table. This means you will have less options to refinance the loan in the future, lower limits and other unfavorable terms.
There is little you can do to overcome the rigid loan standards during a recession. Your best chance is to approach many lenders and negotiate the loans options with each. Shopping around will allow you to compare loans across multiple criteria.