Bridge Loan Benefits: What You Need to Know

Commercial bridge loans provide funds to a business on a short-term basis to start a project or complete the purchase of property before securing permanent long-term financing. The following points will help you understand key elements of bridge loans and how they can help your business.

Bridge Loan Basics

Commercial real estate loans for even a modest residential or commercial development typically are in the millions. Often, businesses need to move quickly to buy the right piece of land or to grab a retail property out of foreclosure, as just two examples. 

A bridge loan can be quickly approved so the business owner can complete the purchase before the opportunity gets away. There is then time to get permanent, long-term financing, which typically is used to pay off the bridge loan.

Because they are higher-risk loans, bridge loans typically have higher interest rates and fees than conventional business loans.

Flexible Terms

An advantage of bridge loans is their flexibility. Bridge loans can range from a period of weeks to about three years. Interest rates are negotiable and will vary with the estimated risk of the project. But in most cases, interest rates on bridge loans are higher than on conventional business loans.

The loan-to-value ratio of a bridge loan typically is 65 percent, compared to 80 percent for traditional commercial loans. That means the loan will be funded for 65 percent of the property's current market value. The borrower will have to cover the other 45 percent or arrange for a second loan. The lower the loan-to-value ratio the better the interest rate because the borrower is sharing more of the risk.

Lenders may also ask for collateral other than the property being purchased. Such cross-collateralizing further reduces the lenders risk for the quick funding of a speculative venture.

Quick Turnaround

If a business is known to a lender and the lender has confidence in the business' ability to pay, a bridge loan can be applied for, approved and funded in days. Prior to funding, the lender will issue a commitment letter, committing to fund the loan as long as circumstances of the approval don't change. With the letter committing to the bridge loan, the business can keep the transaction alive until the loan is funded. 

Points to Consider

Bridge loans are for experienced business borrowers. These types of business loans often are approved with little documentation and in a short time. A relationship with a lender is a prerequisite.

In almost any borrowing scenario, your chance of getting the business loans you want will improve as you deepen your relationship with your lender. Multiple lending relationships create more opportunities.

Bridge loans are designed for quick action on specific opportunities. They are non-traditional business loans. This type of financing can help your business grow, but the costs can be high and securing one can be difficult.

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