Let’s make a scenario. Your company needs capital now. You’ve requested a loan with your bank, however the lender lets you know that could be weeks before getting your funds. You want the reduced rates and favorable the loan, however, you don’t wish to take part in the waiting game. Anything can happen in the time it takes for the loan to become disbursed, and you can find yourself in a cash crunch that jeopardizes business operations.
On another hand, you could go to an alternate lender and receive funding with a much shorter turnaround — even while quickly as the following day. The down-side, though, is that a high-interest rate, additional fees, and shorter repayment terms imply that your loan could be more expensive — which could also negatively impact your business.
Fortunately, you aren’t tied to these two choices. There is a method of getting the funding you need now while awaiting your long-term loan. That choice is known as a commercial bridge loan.
If you need a way to cover gaps in income while waiting for the loan disbursement, keep reading because a bridge loan might be exactly what you’re searching for.
What Is really a Commercial Bridge Loan & What exactly are They Used For?
A commercial bridge loan is a type of short-term loan that companies use because they seek a more long-term funding option. This loan bridges the space in cash flow between the time a business applies for funding towards the time that money is disbursed.
Commercial bridge loans are used for a number of purposes. Most commonly, these loans are used to secure real estate quickly. If your business owner finds a great deal with an business building, securing a home loan or any other property loan is time-consuming, and they could miss out on this opportunity. With bridge funding, the business owner could secure short-term funding quickly, purchase the property, and also have time to secure a low-cost, long-term loan.
Bridge loans may also be used to fund the cost of renovations, because of your personal real estate or for investment properties. Other large purchases, such as equipment, can also be purchased with bridge loans. Another way that bridge loans are used is when acquiring another business.
The most important thing to keep in mind is that a bridge loan is really a temporary funding solution. Loan terms are often quite short, and interest rates can be high, so you want to pay this kind of loan off as soon as possible by securing low-interest, long-term financing elsewhere.
How Commercial Bridge Loans Work
A commercial bridge loan works similar to other business loans. The company owner applies having a lender, provides information and documentation required to close the borrowed funds, and receives funding quickly — sometimes in a matter of days.
The lender will consider several factors before approving an application, which we’ll discuss in more detail in a later section. For the time being, though, something the lender will appear at may be the loan-to-cost (LTC). The LTC may be the maximum number of the total cost the lender will give to a borrower. For most lenders, the LTC is 70% to 80%.
Let’s take a look at an example. You want to buy a property that is costing $100,000. The lending company is willing to provide a bridge loan of 80% LTC. This means that the lending company provides you with a loan of $80,000, when you will be necessary to come up with the rest of the $20,000.
The lender sets the rates and terms for your bridge loan (more about that later). When your loan qualifies, funds will be disbursed to be able to make your decision. Should you bought the home in the example above, you would make payments as agreed before you secure a mortgage or other long-term funding that covers the main, interest, and any fees required by the lender.
Another thing to note is that the property being purchased with loan funds is usually the collateral that secures the loan. Which means should you default in your agreement to repay the lender, the lender has the to seize then sell the home to extract its losses.
Typical Bridge Loan Terms
Bridge loans are temporary, short-term solutions to cash flow problems. Most bridge loans have repayment terms of twelve months or less. Some lenders may provide bridge loans with longer terms, however these generally will not exceed two years. Many bridge loans will have to be repaid in just a matter of months, giving you lots of time to secure more permanent financing.
Typical Bridge Loan Rates
As with any kind of business funding, terms vary by lender. However, you need to get into bridge loans knowing that the rates are greater than your average loan. Count on paying a minimum of double the prime rate or roughly 8% to 11%. Since terms for bridge loans are extremely short, lenders use high rates to make money business investments.
The interest isn’t all that you have to consider, either. Most bridge loans have some of fees that must definitely be paid. These include:
- Origination fees
- Escrow fees
- Appraisal fees
- Title fees
A prepayment fee can also be applied should you pay the loan off early, so make sure to ask your lender about this fee and then any other applicable fees that may increase your cost of borrowing.
What You have to Qualify For A Bridge Loan
The requirements for obtaining a bridge loan varies from bank to bank. However, these loans may not have requirements which are as strict as traditional loans from banks, which is why a lot of businesses use them as short-term solutions until a more favorable loan can be obtained. In exchange, though, the price of borrowing is a lot greater than other financial products. You have to also be able to secure long-term financing before the loan is due, or you risk losing your collateral — typically, the home purchased with loan funds.
Most lenders will appear for the following when determining whether to approve a loan application:
- Affordability: Lenders will consider various factors, including your debt-to-income ratio (DTI) and your debt coverage service ratio (DCSR), to determine in case your cash flow is sufficient to cover current obligations plus any costs associated with your brand-new loan.
- Equity: A bridge loan will only provide around 70% to 80% of the cost of your purchase. You will have to possess the remaining 20% to 30% open to complete you buy the car.
- Property Being Purchased: Lenders will look at what you're making use of your loan funds for. If you’re purchasing commercial real estate, for example, the lending company may consider factors, like the location from the property, its condition, and existing liens.
- Credit History: For those who have a low credit score, this doesn’t necessarily disqualify you against getting a bridge loan. However, lenders may look at your past credit rating to determine if derogatory marks — bankruptcies, foreclosures, and liens, for instance — cause you to a risky borrower.
Is A Commercial Bridge Loan Right For Your Business?
A commercial bridge loan isn’t the right choice for every business. How can you determine whether your company will benefit from a bridge loan? There are some things to consider.
First, consider the reason why you need funds. If you prefer a long-term solution for cash flow issues, a commercial bridge loan isn’t a great fit. However, if you want funds for just one of those reasons, consider speaking with a lender:
- Close An offer Quickly: When the housing market is hot, you need to strike quickly, or you’ll get left out in the cold. Lining up a mortgage or long-term loan may take weeks or even longer, and by that time, you may have lost to another buyer. If you wish to purchase a commercial property fast, you will get the funds you need having a commercial bridge loan, which buys you enough time to secure another source of funding.
- Work On Your Credit: Is the credit preventing you from getting a mortgage or a financial loan? If so, buying utilizing a bridge loan may be a wise choice. If you need to make a purchase now but also have to focus on your credit (i.e., paying down debt or disputing erroneous items in your credit history), bridge loans provide you with the capital you need until you’re in a position to cleanup your credit and acquire another loan.
- Acquire A Business: If you are planning to purchase another business, time is important. Rather than waiting on funding, a bridge loan can help you push the offer forward quickly.
- Renovate Your home: If you wish to enhance your business to draw new clients, a bridge loan will help you obtain the process started on renovations sooner rather than later.
Where To locate Lenders That Offer Bridge Loans
Does a bridge loan seem like a good fit for your business? If that's the case, the next thing is to locate your lender. Where would you get started? Try these options.
- Banks: Many traditional banks offer commercial bridge loans. Start by speaking with any institutions that you simply actually have working relationships with. Even when your bank offers bridge loans, be sure to take a look at other available choices in your town to get the best terms and lowest rates.
- Credit Unions: Lending institutions that provide commercial products and services may provide bridge loans. Start with your bank, or search for ones in your area to find the institution that best fits your requirements.
- Hard Money Lenders: Hard money lenders are eco-friendly that could offer short-term bridge loans. The good thing about hard money lenders is they often place the value of the property over factors such as credit history. However that they may have higher rates than other lenders. Be sure to compare your choices and only work with reputable hard money lenders.
- Alternative Lenders: Some online lenders specialize in bridge loans and other short-term funding. These loans normally have quick turnaround times, and you never even have to leave your office to get the money you'll need.
Learn About Other kinds of Financing For Small Businesses
If a bridge loan isn’t quite the right fit for your finances, have faith — there are numerous other available choices open to assist you to score the capital you'll need. Check out our great resources, starting with the 12 Different Types Of Small Business Loans You Should Know. From affordable SBA loans to flexible credit lines, there’s something for everyone. Then, shop your choices by looking into our small business loan reviews. Once you’ve narrowed down your choices, make sure that you completely understand the loans, terms, and costs of borrowing so that you can take your business one stage further without drowning in a sea of debt. Good luck!
