4 Ideal Scenarios for Using Commercial Bridge Loans

Commercial bridge loans are fast, short-term loans that help entrepreneurs finance a period of time when they need to complete a particular task, such as renovating, selling, or renting a property. Commercial bridge loans are great because they allow borrowers to act and receive funds quickly. They have short terms (typically 6 months to 1 year, but can span to 2 years for an extra fee), and carry higher interest rates than other types of traditional loans due to their short term and immediacy. Read below to learn more about commercial bridge loans and scenarios in which they are ideal.

1. Buy and Quickly Sell
Due to their short terms, commercial bridge loans rarely have prepayment penalties; therefore, these loans a great option for developers who purchase properties and quickly improve them with the loan proceeds. For example, you might buy an empty building, improve it, find tenants for it, and then sell the property to see an immediate profit.

2. As a Bridge to Long-Term Financing
Another great way to use commercial bridge loans involves the acquisition of large properties. Commercial bridge loans allow borrowers to quickly acquire large properties and then successfully operate the business long enough to qualify for long-term financing. For example, let’s suppose that a borrower wishes to purchase a motel. The borrower is approved for a conventional loan with the contingency that he or she must show two successful years of business operation. The borrower has the seller carry back 35% of the purchase price, and then receives a bridge loan for the remaining 65% to fund the purchase. Now the borrower has enough money to set up their business, operate it for a couple of years, and then receive long-term financing.

3. Renovations
Borrowers often use commercial bridge loans for financing renovation, because they offer short-terms and quick cash. For example, let’s say you purchase a deteriorating apartment building. It needs serious renovation before you feel comfortable renting it out to new tenants. You apply for a $500,000 bridge loan to pay off the existing $300,000 mortgage and to cover the $200,000 in renovations. After you make all necessary improvements, tenants flock to the beautiful apartment building and you receive twice as much in rent than the previous owner. Once the new tenants move in, you are able to refinance the bridge loan for $900,000 and pocket almost $300,000. And you're still receiving over $4,000 a in monthly rent from tenants. This is a great way to use a commercial bridge loan.

4. In-Between Buildings
Another good way to use commercial bridge loans is if you buy a new office building and your old office building is still on the market, having yet to sell. A commercial bridge loan will help you to cover both mortgages at the same time.