TL;DR
- Purpose: A bridge loan agreement provides short-term financial relief until long-term funding is secured.
- Key Sections: It includes loan amount, interest rates, repayment terms, collateral, and conditions for fund release.
- Repayment: Specifies repayment schedules, often interest-only initially, with penalties for defaults.
- Interest & Fees: Higher interest rates and fees are typical, including early repayment penalties.
- Legal Compliance: Covers local regulations, dispute resolution, and corporate authorizations.
In the fast-paced world of business, securing the right financing is often crucial to maintaining smooth operations and capitalizing on time-sensitive opportunities. However, navigating the complexities of a bridge loan agreement can be daunting.
We understand that for many small and mid-size distributors and wholesalers in the Philippines, managing large purchase orders with long credit terms while facing limited access to bank loans can be highly challenging and stressful.
According to HTF Market Intelligence, the Global Bridge Financing Services market is expected to witness a Compound Annual Growth Rate (CAGR) of 11.3% during the forecast period of 2024-2030, highlighting the growing need for flexible and accessible financing solutions. As more businesses seek bridge loans, understanding the terms of the agreement becomes increasingly important to avoid pitfalls and ensure that the loan effectively supports business objectives.
In this article, we'll walk you through the key components of a bridge loan agreement, explain how it works, and provide the essential information you need to make informed decisions.
What is a Bridge Loan?
A bridge loan is a short-term financing option designed to “bridge” the gap between immediate funding needs and future income or financing. In the Philippines, SMEs often turn to bridge loans when they need fast capital to maintain operations or seize time-sensitive business opportunities.
Bridge loans are commonly used to:
- Cover cash flow gaps
- Pay suppliers or rent
- Purchase inventory
- Fund operations while awaiting customer payments or long-term loan approvals
Unlike traditional bank loans, which can take weeks or even months to process, bridge loans are typically faster to approve and disburse—making them ideal for time-sensitive business decisions.
In the Philippine lending market, both banks and non-bank financial institutions offer bridge loans, but online lenders and fintech platforms like n90 are increasingly preferred for their speed, flexibility, and minimal documentation requirements. These loans are often secured against business assets, invoices, or personal property; however, some lenders may offer unsecured options at higher interest rates.
Now that you understand what a bridge loan is, let’s explore the key features that make this financial tool valuable for Philippine SMEs.
Key Features of a Bridge Loan
A bridge loan helps businesses cover their immediate financial needs while they wait for longer-term funding to be secured. Here are the key features of a bridge loan:
- Short-Term Financing: Typically lasting between 12 to 24 months, bridge loans are designed to provide quick funding during transitional periods.
- Higher Interest Rates: Since they are short-term and often carry higher risk, bridge loans typically come with higher interest rates compared to traditional loans.
- Secured by Collateral: Most bridge loans require collateral, such as real estate or business assets, to ensure the loan.
- Repayment Terms: Repayment schedules can vary, but many bridge loans have interest-only payments for the first few months, with the full balance due at the end of the loan term.
- Quick Access to Funds: Funds are typically disbursed quickly, making bridge loans ideal for businesses that need immediate capital.
These features make it a favorable option among many small and medium-sized enterprises. Understanding the agreement is also equally important to secure this loan.
What is a Bridge Loan Agreement?
A bridge loan agreement is a contract between the borrower (often a business) and the lender, designed to offer short-term financial relief while the borrower arranges longer-term financing. This agreement outlines the terms for a short-term loan, specifying the loan amount, interest rates, repayment terms, collateral (if applicable), and conditions for loan disbursement.
Common Use Cases in Real Estate and Business
In the Philippines, bridge loans are commonly used in real estate transactions, like when a property developer needs funds to purchase a new property before selling an existing one. Businesses also use them to cover operational costs while waiting for funding from investors or government grants.
For SME owners, bridge loans can help seize opportunities, such as acquiring new stock for a retail business or securing a real estate deal, even when immediate cash is scarce. In fast-paced markets such as real estate and retail, being able to act quickly is often crucial for business success.
However, to take a bridge loan, you need to go through the bridge loan agreement carefully. There will be several sections and terms and conditions in it.
Also Read: How Does A Bridge Loan Work For a Small Business?
Key Sections In A Bridge Loan Agreement
A bridge loan contract should include several key sections to ensure both parties are clear on the terms of the agreement. Below is a breakdown of the essential sections typically included in a bridge loan agreement in the Philippines.
1. Parties
This section identifies the lender and borrower, including all necessary details such as legal names, addresses, and relevant contact information, in compliance with Philippine law.
2. Background
The background section provides context for the loan, including the purpose of the bridge loan and the intended takeout financing that will replace the loan at the end of the term.
3. Definitions
This section defines key terms used in the agreement, such as interest rates and repayment terms, and explains Philippine-specific banking and financial terms to ensure clarity.
4. Facility Amount and Purpose
Details the loan amount and clearly defines how the loan proceeds will be used. For example, a real estate developer may specify that the loan proceeds will be used to purchase land or develop properties.
5. Interest and Fees
This section outlines the interest rate structure (fixed or variable) and specifies any applicable fees, such as origination fees or penalties, in accordance with Philippine usury laws.
6. Drawdown
Conditions and procedures for the disbursement of the loan. This would specify how and when the borrower can request the funds.
7. Repayment Terms
Details the payment schedule, including monthly payments, prepayment options, and the maturity date of the loan. A typical structure in the Philippines includes interest-only payments for the first few months, followed by principal repayments.
8. Conditions Precedent
Conditions that must be met before the loan funds are released, such as completing property evaluations, submitting business financials, or meeting specific regulatory requirements.
9. Representations and Warranties
Standard declarations by the borrower, including those required under Philippine law, such as the borrower's authority to agree and the validity of their financial statements.
10. Covenants
Positive and negative covenants, such as maintaining insurance on collateral and avoiding incurring additional debt, are common in bridge loan agreements in the Philippines.
11. Events of Default
Circumstances that trigger default, such as non-payment or violation of covenants, along with the corresponding remedies, include foreclosure or acceleration of the loan balance.
12. Governing Law and Jurisdiction
The bridge loan agreement specifies that Philippine law governs the contract, with disputes resolved through arbitration or Philippine courts.
Having a clear idea of some of the key features of a bridge loan will be helpful to understand the agreement better.
Duration and Repayment Terms of a Bridge Loan
Knowing the duration and repayment terms is crucial when entering into a bridge loan agreement, as it will directly impact your financial planning.
Typical Duration of Bridge Loans (12 to 24 Months)
Bridge loans typically last between 12 and 24 months. For example, a small business owner needing quick capital for a product launch might secure a bridge loan with a 12-month term to manage operational costs.
Details on Repayment Schedule and Terms
Repayment terms for bridge loans vary depending on the lender and the borrower's needs. A business owner may have a repayment schedule that includes interest-only payments for the first 12 months, with the full loan balance due at the end of the term. Some lenders, like n90, will also have customized repayment schedules that align with their business cycles. Interest rates and fees associated with a bridge loan should be carefully considered before agreeing.
Loan Amount and Disbursement
The loan amount and the terms of releasing the funds are key aspects of any bridge loan agreement.
Details on Principal Loan Amount
In the Philippines, the loan amount for bridge loans can range from ₱500,000 to ₱5,000,000, depending on the business's needs and the collateral provided. A real estate developer might need a larger loan for property transactions, while a small retail business might require a smaller amount to cover operational costs.
Conditions for Funds Disbursement
Funds are typically disbursed quickly once the bridge loan agreement is signed. For example, you may receive loan proceeds within a few days of approval, enabling you to make time-sensitive purchases.
Method of Release
Bridge loan agreements can release funds either in a lump sum or in tranches (instalments). For example, a construction business might receive the loan in multiple tranches, with each tranche being disbursed as certain milestones or construction phases are completed. This method helps ensure that funds are available when needed and that the project progresses smoothly.
Sometimes, it is necessary to provide collateral to secure the loan, which helps protect the lender's interests and ensures that funds are provided to the borrower while minimizing the lender's risk.
Also Read: Types of Business Loans Available For Construction Companies in The Philippines
Collateral and Security Interest
Bridge loans are typically secured loans, meaning the borrower must provide collateral to secure the loan.
Requirements for Collateral in Bridge Loans
In the Philippines, business owners may need to pledge real estate, business assets, or inventory as collateral in a bridge loan agreement. This provides security to the lender in case of default. Qualified collateral can include commercial property, equipment, or inventory.
Lender's Rights and Repossession Process in Default
If the borrower defaults on the loan, the lender has the right to seize and liquidate the collateral. For example, if a business in Davao fails to repay its bridge loan, the lender could take ownership of the pledged property and sell it to recover the loan balance.
There will be other conditions also applicable, such as the requirement for the borrower to comply with specific financial covenants.
Governing Law and Dispute Resolution
The bridge loan agreement should specify the governing laws and methods for resolving disputes.
Identification of Applicable Governing Laws
For bridge loan agreements in the Philippines, the governing law will generally be Philippine law, ensuring that both parties adhere to local regulations.
Preferred Dispute Resolution Methods
Disputes are often resolved through arbitration or mediation, offering quicker and more cost-effective alternatives to traditional litigation.
Process for Enforcing Arbitration Awards
The bridge loan agreement will specify the process for enforcing any arbitration awards, ensuring that both parties are bound by the decision in a legally enforceable manner. Arbitration awards are typically binding, and if necessary, can be enforced through the Philippine court system.
It is important to ensure that all necessary documentation is in place and properly executed to uphold the terms of the agreement.
Entire Agreement and Amendments
The "entire agreement" clause is a critical component of any bridge loan agreement, ensuring that both parties are fully aware of the terms and obligations outlined in the contract. This clause prevents any confusion or disputes that may arise from oral promises or side agreements made outside of the written contract.
Explanation of “Entire Agreement” Clause Purpose
The "entire agreement" clause ensures that the bridge loan agreement serves as the final and comprehensive document representing the full understanding between the borrower and lender. This clause eliminates the possibility of side agreements or verbal promises that are not included in the written contract, offering both parties a clear and enforceable understanding of their rights and responsibilities.
- Any changes or amendments to the bridge loan agreement must be made in writing and signed by both parties to be legally valid. This clause prevents either party from claiming that additional agreements or promises were made outside of the written contract.
- This clause ensures that only the written terms regarding the loan amount, repayment schedule, interest rate, and collateral are binding, excluding any other informal arrangements.
For example, if a lender promised an informal payment deferral, but this was not included in the written bridge loan agreement, the "entire agreement" clause would prevent the lender from later claiming that such an agreement exists.
In addition to the key sections, there are supplementary schedules that provide further clarity and ensure both parties understand the specific details.
Schedules To Include In a Bridge Loan Agreement
Including specific schedules in the bridge loan agreement ensures that both parties clearly understand the full terms and conditions of the agreement. These schedules outline the detailed processes, timelines, and requirements related to the loan and help prevent confusion. Here are some essential schedules typically included in a bridge loan agreement in the Philippines:
1. Schedule 1 - Drawdown Notice Form
This schedule provides the template or format that the borrower must use to request the disbursement of funds. For instance, if a business owner is securing a bridge loan to cover immediate operational costs, they must submit a drawdown notice as a formal request to the lender, requesting the release of the funds.
2. Schedule 2 - Conditions Precedent Documents
This schedule lists the specific documents the borrower must submit before the loan funds can be disbursed. These documents might include property appraisals, updated financial statements, proof of insurance, or other compliance-related documents.
3. Schedule 3 - Repayment Schedule
A detailed repayment schedule outlines the dates and amounts of each payment, including principal and interest. This ensures that both the borrower and lender are clear on payment expectations and timelines.
4. Schedule 4 - Fee Schedule
This schedule provides a detailed breakdown of all fees associated with the loan, including origination fees, late payment penalties, and early repayment fees. For example, you may be provided with a detailed fee schedule that explains any additional charges associated with the loan, helping to avoid surprises.
5. Appendix A - Security Documents
If the loan is secured, Appendix A will include copies of the documents that pertain to the collateral provided for the loan. In the Philippines, this may include property titles, business asset ownership documents, or inventory listings. This appendix clarifies what is being pledged as collateral and protects the lender's interest in case of default.
6. Appendix B - Compliance Certificates
This appendix provides templates for compliance certificates, such as proof of insurance coverage, tax payments, or maintaining required levels of financial solvency. A business owner may need to submit quarterly compliance certificates to demonstrate that the business continues to meet the loan's conditions, such as maintaining adequate insurance on the pledged property.
7. Appendix C - Corporate Authorizations
For business borrowers, this appendix outlines the corporate approvals required to enter into the bridge loan agreement. This could include board resolutions or shareholder agreements. For example, if an SME in Quezon City is borrowing to expand, the agreement may require corporate authorizations to demonstrate that the business's board of directors has approved the loan.
Having a trustworthy financial partner or lender should be the first step, so the agreement doesn't overwhelm you or create unnecessary stress. Trust and clear communication from the outset ensure that the process is smooth and aligned with your business goals.
Handling Bridge Loan Challenges with n90
For business owners in the Philippines, securing the right bridge loan agreement is essential in managing short-term financial gaps. The bridge loan agreement serves as a short-term solution to cover immediate expenses, but navigating its complexities can be overwhelming. Many small and medium-sized enterprises (SMEs) face the added challenge of ensuring these agreements align with their cash flow needs and business goals. That is why we can assist you.
At n90, we offer a tailored solution to help SMEs handle these challenges with ease. By offering customized bridge loans with flexible repayment options, n90 provides the support you need to bridge the gap between your immediate financial needs and long-term financing.
- Tailored Loan Amounts: Borrow based on your business size and financial standing.
- Flexible Interest Rates: Select between fixed and variable rates that best suit your financial situation.
- Custom Repayment Plans: Choose from a range of repayment terms to align with your business's cash flow cycle.
- Quick Loan Processing: Fast approval and disbursement to ensure you can act on opportunities quickly.
- No Hidden Fees: Transparent pricing with no surprise costs, so you know exactly what you're committing to.
With us, you can streamline your financial process and stay focused on growing your business, all while securing the short-term capital you need to succeed.
Conclusion
Bridge loans provide SME owners like you with a flexible and short-term solution to meet your immediate financial needs. From understanding the loan amount and repayment terms to the various fees and collateral requirements, it is essential to carefully assess every aspect of the agreement to ensure it aligns with your business's objectives.
n90 is here to help you with flexible, tailored small business loans that bridge your financial gaps and empower your growth. With no hidden fees, competitive interest rates, and customized repayment plans, N90 offers the support you need to take your business to the next level.
Ready to grow your business? Apply for a loan with n90 today, and let us be the partner that helps you grow with clarity.
FAQs
1. Can a bridge loan be used for personal expenses?
No, a bridge loan is specifically intended for business or real estate purposes. Personal expenses typically don't qualify, as the loan is meant to bridge financial gaps related to business operations or asset acquisition.
2. Can the terms of a bridge loan agreement be renegotiated?
Yes, the terms of a bridge loan agreement can be renegotiated if both parties agree to the changes. Any amendments must be made in writing and signed by both the borrower and the lender to be legally binding, ensuring clarity and protecting the interests of both parties.
3. What happens if I am unable to repay the bridge loan on time?
If the borrower cannot repay the bridge loan, the lender has the right to seize and liquidate the collateral provided. This may result in the loss of property or business assets, depending on the terms of the agreement.
4. Are bridge loans available for startups?
Bridge loans are typically more accessible to established businesses with a proven track record and collateral. Startups may find it more challenging to secure a bridge loan unless they have significant assets or a solid business plan in place.
