Call it a commercial bridge loan. Call it bridge financing. Call it gap financing or swing financing. Whatever name you use, it doesn’t change what you’re getting in return.
A bridge loan is a short-term tool designed to bridge the financial gap between your current situation and what you expect to happen in the future.
For example, if you’re interested in purchasing commercial real estate, a bridge loan can be used until you secure a mortgage.
How does a Commercial Bridge Loan Work
As noted above, the primary purpose of a bridge loan is to hold you over financially during the period of time between making a purchase and securing longer-term financing. These are specialist commercial finance solutions for property and purchases with a clear exit strategy.
As a short-term loan, expect your term to last between several months and no longer than a year (although there are exceptions to this rule). There are usually no exit fee, or exit plan repayments required if the finance is paid off in the agreed term and you keep up repayments.
What About Collateral used as security?
As a collateralised or secured loan, you’re required to put up an asset that you already own to reduce the risk to the lender, such as property or a retail unit for example.
For example, if you’re buying commercial real estate, you could use your personal home to secure the property. The risk with this is that the home may be repossessed if you default on the loan.
On the plus side, bridging lenders often approve borrowers based on the value of their collateral, as opposed to their down payment, credit history, and/or credit score. So, with the right collateral, it’s easier to secure bridging loans when compared to most other types.
Commercial Bridging Loan: How to Use It
There’s no right or wrong way to use a commercial bridging loan. As long as you have a specific use in mind, along with everything necessary to qualify, you should be able to proceed in an efficient manner
Here are some examples in which commercial bridging finance could help your business and financial situation as a whole:
- Real estate: Maybe you find the perfect piece of real estate. And maybe you realise that it’s in high demand. Rather than wait to receive mortgage approval, you want to take fast action. There’s where a commercial bridging loan can help. Since it’s easier to receive funds in short order, you minimise the risk of missing out on the property.
- Moving your business: Moving your business from one location to another is never easy. From a logistics point of view, you’ll soon find that it’ll set you back quite a bit of money. Not only can you use a commercial property bridge loan to purchase your next space, but it can also help with other moving expenses.
- Maintenance and renovation: If you already own property and want to hold onto it, maintenance and renovation costs may soon move to the forefront. Bridging loans can be used for anything and everything on this front, such as replacing the roof, upgrading the electrical system, or removing walls to make for a more open workspace.
Along with the above, if your credit score is less than desirable, a bridging loan may be just what you need. This allows you to make your purchase and increase your score in hopes of eventually securing more permanent long-term financing.
Tip: know your credit score before applying for a bridging loan. This will give you a better idea of if a bridging lender is your only option.
Do You Qualify for a Bridge Loan?
If you’re interested in applying for a commercial bridging loan, it’s critical to understand the eligibility requirements and qualifications you must meet.
While this varies from one lender to the next, there are some basic requirements to keep in mind:
- The value of the collateral is a big deal: When it comes to lending criteria, this is one detail you can’t forget. If you don’t have something of value to secure your loan, you’ll find it difficult to receive approval. Lenders consider the best customers those with the property they’re willing to use as collateral.
- Loan to value comes into play: It differs by lender, but most bridging finance loans are capped at 80 percent of the property’s value.
- Lender specific requirements: Every lender has its own specific requirements, which is why it’s so important to shop around. For example, if you’re buying a commercial property, your lender may take into consideration any active liens, the condition, and the location.
Note: lenders will also look into your background to determine if you’re a credit risk. For example, if you’ve defaulted on funding in the past, have filed for bankruptcy, or have a history of foreclosure, it’ll make it more difficult to secure a loan.
Terms and Conditions
No two bridging loans are the same, so don’t assume that the terms and conditions associated with one lender will hold true with another. Read the fine print and ask questions before you sign on the dotted line.
For instance, interest rates can vary greatly. When all else is equal, you’re likely to choose the lender with the most competitive rate.
Here are some of the common terms and conditions associated with this type of business loan:
- Loan amount: Commercial bridging loans generally range from $1 million to $10 million, however, you may find lenders that offer a lower or higher loan amount.
- Interest rate: Expect somewhere in the 10 percent or higher range. Not only do interest rates vary from lender to lender, but it also depends largely on your collateral, credit score, and history. Knowing your interest rate upfront will help you budget for your future loan payments.
- Loan terms: Most bridging loans are for 6 to 12 months. This is a short term, so some lenders may be willing to expand.
- Fees: Another detail that can vary greatly, this includes but is not limited to legal fees, arrangement fee, escrow fee, title fee, and the appraisal fee. Some lenders even charge an early repayment fee.
- Repayment: You take out a bridging loan with the idea of paying it back based on the terms and conditions. The repayment conditions are outlined in your loan documents. It’s here that you’ll find out what type of loan you have. The most common are fixed monthly payments, interest-only payments with a balloon at the end, and a one-time repayment at the end of the predetermined term.
If you have any questions about the terms and conditions associated with a bridging loan, clear the air before you proceed. You don’t want to agree to something that will negatively impact your situation in the future.
Use a Commercial Bridging Loan Calculator
If you’re interested in comparing bridging loans, it helps to use a calculator. Benefits include:
- The ability to play around with the numbers before applying
- A better understanding of how much money you’ll pay every month
- A clear idea of how your interest rate affects your monthly payments and overall cost
For example, property investors can benefit from using a loan calculator, as it gives them a sound understanding of what they’re getting into if they secure a loan. It also helps them calculate their potential return on investment (ROI).
Commercial Bridging Loans: Start Your Search
Now that you know more about these loans, you can make a final decision as to what you should do next.
Maybe you compare bridging finance loans from several lenders. Or maybe you consider if another type of loan makes more sense.
If you’re ready to start your search, there are a few places you can turn:
- Online broker: When you work with an online broker, you gain access to the largest network of lenders. Furthermore, your broker does all the work on your behalf. You simply have to compare lenders and loan terms. Tip: ask about any broker fees upfront.
- Contact a bank or credit union: For example, if you already have a relationship with a local bank or credit union, contact them to ask about the many types of loans that they offer. Even if you don’t end up going down this path, they can provide you with useful information.
- Private commercial financial services companies: These companies aren’t in the same category as banks and credit unions. They work on their own, thus allowing them to avoid some of the red tape that often slows down the application process.
No matter what you do, be sure that you check the registration number of any lender you’re considering. You want to make sure they’re legit. Once you know that they’re authorised and regulated to do business in your area, such as England and Wales, you can move forward with confidence.
It’s our hope that you now have everything you need to make an informed decision. There are many solutions out there, but a commercial bridge loan could be just what you’re looking for.
If you have any questions or concerns, contact us for professional advice and guidance. Through our website, you can begin your search for a loan that meets all your specific requirements. From there, you’ll feel better about moving forward with commercial financing in the near future.