16 Mar How Do Commercial Bridge Loans Work
In many business transactions, you need funds fast. However, the nature of many industries is that it takes quite some time to close deals. This is very true when it comes to real estate. Where a bridge loan comes into play is getting funds to carry you while these deals actually close. A bridge loan can give you immediate funds to buy real estate, expand operations and manage cash flow, among other reasons, as a business owner. Our lending professionals will be able to help you with this process.
Definition of a Bridge Loan
Commercial bridge loans are a very specific type of financing and differ from other types of loans. Bridge loans are also known as:
- Bridge Financing
- Swing Financing
- Gap financing
- Interim Financing
As the name implies, commercial bridge loans are used to “bridge the gap” between a business’s current need for financing and a more long-term financing solution. We have found that getting commercial bridge loans have helped all of our clients get to the next step in their business.
These loans are short in nature
When you are looking at a bridge loan, make sure that you understand the short nature of the loan. This isn’t like an auto or business loan that you can pay off over time. You need to make sure that you are only planning on having this loan for six months to eighteen months. If you need a longer time to pay this loan off, you will want to look at other sources of funding. Our lending professionals will be able to help you determine whether or not a bridge loan is a good fit for your current financial situation.
Here are some different items to consider when getting a bridge loan:
Closing time frame
We want you to know that the closing time frame is much shorter than a traditional loan. A commercial real estate bridge loan allows an investor to quickly arrange financing when time is of the essence.
It is usually much easier to get a real estate bridge loan than a long-term loan. While bridge loans may have a credit score minimum, they also consider loan qualification factors.
- Debt to income ratio
- Track record of borrowing
- Your assets
- Your ability to succeed
Factor in origination fees
When you are getting a bridge loan, you need to understand that you are going to have origination fees with this loan. These fees are going to be essential when securing the loan. Unlike many loans, you will not be able to just get the loan free and clear off the bat. Instead, you will need to have money set aside for loan origination fees.
You will have to understand the interest rates
With a short-term bridge loan, you need to understand that there are going to be higher interest rates. However, due to this loan being a short-term loan, you won’t be paying too much interest rates. While you may look at a higher interest rate and be less motivated about the idea of a bridge loan, understand that you will not be racking up too much in interest payments during the time you have the loan.
Bridge loan lenders typically want the loan to be paid off quickly, without a prepayment penalty. A commercial real estate bridge loan does not have a prepayment penalty. This is a huge bonus!
How do bridge loans work in commercial lending?
Bridge loans are a very common thing in real estate transactions. These loans are usually secured, meaning they’re backed by collateral of some type, such as inventory or real estate. Bridge loans can also be used by business owners and professionals, to cover large purchases or temporary gaps in cash flow.
These types of loans are a form of asset-based lending for real estate investors – where private money lenders are primarily concerned with the property’s value rather than the borrower’s credit scores or what’s in the borrower’s bank account. Hard Money Bridge Loans bridge the gap between those who do not have the ability to go to the bank due to poor credit and their dream of becoming real estate entrepreneurs. Where the banks say “No”, the hard money and private lenders like Nelson Funding can still say “Yes”.
Example of some terms you might want to know
Here is an example of a commercial real estate hard money loan:
Location: Sacramento, CA
Size / Loan Amount: $11,894,113
Interest rate: 11%
LTV (Loan-to-value): 77%
LTV (Loan-to-cst): 86%
The advantages of this are the loan amount is determined by the property value. The fast closing process for everyone. Limited borrower qualifications are required.
Your equity can help you get a bridge loan
The more equity that you have in your home, the easier it is going to be for you to get a bridge loan. It is important for you to understand that you are going to have to put your home up as collateral for a bridge loan. When you understand this risk, it is easier for you to move forward on this loan with confidence.
Having good credit is a bonus for a bridge loan
When you are dealing with bridge loans, you typically need to have good credit. This is due to the short nature of the loan. You need to understand that you are going to have a short time to pay this back. If you are not able to sell your house quickly, you should be able to extend the loan until your house sells. However, it will be very hard to extend the loan or even find one to begin with if you have bad credit.
Bridge loans are a great tool to utilize. You may not have the funds that you need right now, but you can get one with a bridge loan. Our experienced lending professionals will be able to walk you through the different ways in which we can find you the very best bridge loan for your transaction. So, what are you waiting for? Give us a call today. We will be able to help you get into your dream with the help of a bridge loan.