Commercial Bridge Loans: What Are They Good For?
Commercial Bridge Loans: What Are They Good For?
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As their name implies, commercial bridge loans serve as a bridge over any gaps in financing that the borrower might be experiencing. They can also be used to free up capital so that it can be used elsewhere for a short time. Because they are secured by the value of the asset, they can be considered a type of hard money loan and, like hard money loans, they are typically short-term (usually six months to a year) and offered by private lenders. Commercial bridge loans are an efficient, strategic tool that allows borrowers to bypass equity constraints or take full advantage of time-sensitive deals.
Here are some situations in which a commercial bridge loan can help a borrower out of a tight situation:
- You have a balloon payment on a commercial loan that is coming due in the near future but you have yet to finalize permanent financing for the property.
- You find a good deal on a prime property but it’s not going to be available long enough for you to line up conventional financing.
- You need temporary financing to make improvements or completely rehabilitate a distressed property before applying for a long-term commercial mortgage.
- You require additional cash flow to cover property costs while you finalize tasks such as finding new tenants, preparing to sell, or attempting to refinance.
As with most private financing, commercial bridge loans do come at a slightly higher cost than traditional, long-term financing. These expenses counter the higher risk that is an inherent part of such loans, but the costs are usually more than outweighed by the benefits and profits that can be reaped by obtaining these temporary funds.
The typical repayment strategy for commercial bridge loans is to obtain permanent, long-term financing (usually through a bank or other conventional lender). Due to their short-term, temporary nature, private lenders rarely charge prepayment penalties on commercial bridge loans.
Having an established relationship with a private or hard money lender can be extremely handy if you find yourself unexpectedly in need of a commercial bridge loan as they specialize in quickly and efficiently underwriting short-term financing.