Just as the name implies, bridge loans are designed to fill funding gaps until other, more conventional financing is available. Because a bridge loan is different than other, more traditional style loans, they only make sense in certain circumstances.
In those situations, though, bridge financing can make a huge difference in the way a real estate transaction plays out.
Following is more information about this type of financing, and six scenarios when it likely makes sense to get a bridge loan.
What Is A Bridge Loan?
A bridge loan is a loan with shorter terms than other loan programs available at Raisal. Raisal bridge loans are available for commercial properties on terms ranging from three months to 36 months. Most borrowers find that 36 months is ample time to get traditional financing solutions in place, or to recognize needed revenue to continue operating after the bridge loan is reconciled.
What Are The Advantages Of A Bridge Loan?
Bridge loans have many advantages over other short term financing options. At Raisal, qualified bridge loans can be finalized and funded in as little as a few days. This alone is one of the main reasons why bridge loans are popular with savvy commercial investors who often need to act quickly. Yet another advantage of bridge loans is the interest-only amortization schedule, which allows borrowers to make minimal payments and still remain compliant with the bridge loan terms.
What’s more, bridge loans at Raisal are available for a wide variety of commercial property types, including:
- Office Buildings
- Retail Buildings
- Mixed-Use Buildings
- Industrial Facilities
- Apartment and Condo Buildings
- Hospitality Properties
- Vacant Land
- Parking Lots
- Self-Storage Facilities
- Senior and/or Disabled Housing Properties
- Automotive Restoration/Repair Properties
What are the Drawbacks to a Bridge Loan?
Every loan program has pluses and minuses, and bridge loans are no exception. The key to deciding if a bridge loan makes sense is to measure the benefits against the disadvantages in your particular circumstance. Bridge loans inherently carry a higher interest rate compared to traditional financing, but this is because the loan term length is much shorter. Loan origination fees can also be expected to be a bit higher for the same reason. Of course, the short terms could also be considered a disadvantage, but again, 36 months is typically considered to be long enough to stabilize income or generate ongoing operating revenue.
Often, borrowers refinance bridge loans at the end of the term with more traditional financing institutions.
When Does it Make Sense to Get a Bridge Loan?
Many different kinds of individuals and businesses obtain bridge loans. Raisal offers bridge loan opportunities to investors, business owners and even individuals who are looking to get into the commercial real estate market for the first time. For all these types of borrowers, there are numerous scenarios when it makes sense to get a bridge loan.
1. You’re Buying A Property, But Haven’t Yet Sold An Existing Property
Business owners who own their own commercial space can take advantage of a bridge loan. If you own your business property and have decided that you want to move, financing that transaction can be tricky unless you avail of a bridge loan. You might want to move your business to a new location for various reasons:
- Property taxes are increasing every year
- Local crime rates are getting disturbingly high
- Demographics of the neighborhood no longer support your business
- The city is undergoing rezoning that will affect your permit
- Your parking lot no longer accommodates your burgeoning business
- You’re expanding your enterprise and need more space
- The existing building needs more work than it makes sense to invest in repairs
- You own the building, but lease the land, and you prefer to own both
Whatever the reason for your business move, a bridge loan can help you get funding to put down on a different business property and help finance the move itself while you await a buyer for your old commercial space.
2. You’ve Purchased Rental Space Property And Are Awaiting Tenants
A commercial investment in a property with rental space can be very lucrative. Rental space properties such as mixed-use buildings, hotels and apartment buildings have the potential to bring in a lot of money in rents and ancillary fees. But if the building is new or undergoing renovations, you may have empty units with no immediate rental income. In the meantime, you need to pay for the operation and maintenance of the building. This is a classic scenario when it makes sense to get a bridge loan. A bridge loan can tide you over until the swell of tenants moves in, after which you’ll be able to settle your bridge loan in full.
3. You’re Waiting On Equity Financing
If you’re a developer relying on equity financing to get the funds to bring your project to completion, you could be in a very uncomfortable spot. Pricing on materials can be extremely volatile. Not being able to pay upfront when prices are low could put you in a position where you end up having to pay more for materials. This can lead to you going way beyond your original budget, which will only increase your financial precarious position.
In addition, you may not be able to get vendor credit for supplies, depending on your history of doing business with any one particular creditor. This is another scenario when a bridge loan makes good sense. A bridge loan can secure you the capital to continue construction until your equity financing closes.
4. You Found a Great Deal But Lack the Cash to Make it Happen
Savvy investors are always on the lookout for good deals on commercial properties. Unfortunately, the timing doesn’t always work out in your favor. You may have just closed on a deal and used up all your liquid capital. Or, you may have had to prepay on materials for a construction project in order to take advantage of special pricing. In any event, this scenario is one that warrants taking out a bridge loan. The bridge loan can give you the capital to secure that great deal before someone else nabs it.
5. The Situation Has Changed on an Existing Construction Project
In the world of commercial construction, the ability to be flexible is key. Terms can change with very little notice. While engineers call this “unforeseen circumstances,” for investors, this often spells one word – disaster. Unforeseen circumstances invariably lead to increased construction costs, and not every commercial investor is financially prepared to supply the additional money to pay for the added materials and labor. A bridge loan is ideal for a scenario like this, giving investors access to the fast funding needed to reconcile the new situation and keep the construction project on track.
6. More Working Capital is Needed to Fulfill a New Contract
Every commercial business owner is delighted when they’re able to sign a new contract for more work; especially if the contract involves a large fee for more incoming work for the business. But often with increased work comes the demand for more labor and/or supplies. With an executed contract in place but not enough resources to fulfill the terms, the business is in jeopardy. There are both legal ramifications and business reputations at stake. This is a scenario when it makes sense to get a bridge loan. Using bridge loan funds to fulfill the terms of a new contract can not only enable the business owner to keep his business promises, but it can enable them to win a new satisfied client for the long term.
What Does It Take To Qualify For A Bridge Loan?
Every bridge loan application is considered on its unique, individual merits. In general though, bridge loan applicants should be prepared to have a solid plan in place for use of the funds. They should have an exit strategy, or a plan to reconcile the bridge loan terms. As bridge loans do have regular closing fees, borrowers should be prepared with a sum of cash in order to close on the bridge loan.
There are also specific property, personal and business documents that you may need to provide, including things like income and expense statements, the rent roll, personal financials, your business’ P & L statement, and more.
If you have questions about qualifying for a bridge loan, you can always call an experienced advisor at 1-855-407-5626 who can assist you with answers regarding your particular circumstances.
Ultimately, it will be up to you to decide whether a bridge loan is the answer to your temporary cash needs. Often, borrowers find that bridge loans enable them to breathe a little easier, knowing that they have the cash on hand to take care of such things as operating and maintenance expenses, hire additional labor, buy sufficient materials, or take advantage of lucrative opportunities in the commercial real estate market.
When a competitor is looking at the same property, a bridge loan can make the difference between acquiring an attractive property or losing out yet again because money was an obstacle.
Bridge loans are often ideal when occupancy and, subsequently, revenue rates are low. They also make sense when the borrower’s credit profile disallows other, traditional forms of financing, or when there is a small window of time in which to close on the property.
There are many other times when it makes sense to get a bridge loan from Raisal. If you are an individual investor, property owner, business owner or developer and you find yourself short of funds to finance your next commercial property purchase, get started today to learn if a bridge loan might be the solution.