Things to Keep in Mind when Applying for a Commercial Bridge Loan

Things to Keep in Mind when Applying for a Commercial Bridge Loan

Many companies who require financing might consider applying for a commercial bridge loan. This type of load is not uncommon in the commercial real estate industry. However, like other types of loans, you must be well informed about the nature of this loan and how it works. In this article, we will be explaining to you what a commercial bridge loan  is and the things you need to know when applying for it.

What is a Commercial Bridge Loan?

This type of financing is often also referred to as swing or gap financing. It is a form of financing typically used while waiting for a more permanent one, such as mortgages. The most common business the use this are those who buy, refurbish, and sell real estate properties.

Now, you may be wondering how exactly does a commercial bridge loan work? Well, the idea of this loan is to help you stay afloat between the gap of your purchase and getting a loan. You see, mortgages are not automatic. Sometimes, you have to wait for months and even years for it to be approved. In that gap period, you need to shell out your own money, and if you are short of funds, the commercial bridge loan is an option for you.

Bridges loans are typically short term, and they don’t last more than a year. Moreover, it is a type of loan the needs collateral. You can use a property that you already own or will be acquiring. And unlike mortgage loans, bridge loans are more accessible.

Things To Know When Applying for a Commercial Bridge Loan

Now that you understand what a commercial bridge loan is, let us dive into the details of what you need to know when you are applying for it. Here are they:

  • Compatibility

Before applying for the loan, you must first identify whether you need it or not. The first thing that you have to ask yourself is whether you have collateral to apply for it since it is a collateral loan. Next, you must consider whether you can carry the interest expense.

Here are several scenarios where commercial bridge loans are compatible with:

  • Moving to a different business location

If you are planning to relocate your business, you can make use of a commercial business loan to make that possible, especially if you are purchasing the location that you are transferring to.

  • Buying Business assets

When your company is in an immediate need for new equipment, you can use a commercial bridge loan to fund the down payment.

  • Refurbishing already owned commercial properties.

An excellent example of this is business who flips properties and sells them. They require immediate finances to do the renovations, and they can get that from commercial bridge loans.

  • Loan Period

You must know that a commercial bridge loan is a short term loan. The loan period often does not exceed one year, depending on the contract. However, interest rates are usually higher and more expensive if you have a more extended loan period. If you can, and if you want to save money from interest, it is ideal to opt for a shorter loan period.

  • Interest Rate

Since bridge financing is a quick and short term loan, its interest is quite high. A conservative estimate of its importance is around 9%-11%. These interest rates can be in different types of repayment.

You can either opt for an unamortized payment where you pay the bulk of the interest rate at the end of the term of your loan, or you have it amortized. Amortization is a staggered payment of fixed payments month. 

  • Loan Cap

Also, you must know that this type of loan has a cap. Most of the time, the total loanable amount is only up to 80% of the property you will use as capital. For example, if your property value is $100,000, your loan cap will not exceed $80,000.

  • Qualifications

Qualifications for this type of loan depends on the financial institution that you are getting it from. However, it does require general loan requirements such as credit score, debt coverage ratio, liquidity, net worth, etc.

Getting a commercial bridge loan is not automatic, and it does require extensive investigation on the part of the lender. This is why, as much as possible, your documents should be stellar. You must have a good credit standing, history, and reliable financial assets as well.

  • Collateral

As mentioned above, this loan requires collateral, unlike credit cards or personal loans. Often, the collateral that businesses use is the ones that they already own or will be acquiring in the future. Collateral is crucial because it helps put the lender’s confidence in allowing you to borrow money. After all, they are holding on to something of the value to you.

  • Fees

There are several fees involved in commercial bridge loans, aside from the repayment and interest. You must know about this before even applying for it. Here are the possible fees included when you apply for a bridge loan:

  • Prepayment Penalties

When applying for a commercial bridge loan, you must ask whether the lender imposes prepayment penalties. A prepayment penalty is something that you have to pay when you are repaying in advance or bulk to pay it off early.

  • Brokerage Fees

A commercial bridge loan can be applied through brokerage websites. The advantage of this website is that almost everything is convenient for you because of the assistance in searching for a compatible lender and preparing your documentation. As a result, you will have to pay a broker’s fee. The rate of this fee depends on one site to another.

  • Origination Fees

The lender upfront charges origination fees for processing an application. It is highly similar to a service feed. They can cost up to 6%, but again, it depends on the lenders and how much they charge.

Final Thoughts

Commercial bridge loans are ideal for businesses who need quick financing. However, it does come with several risks as well. This is why it is essential to know the details mentioned above to help guide you to make an educated decision. When commercial bridge loans are done right, they will surely help expand or finance whatever business endeavors you have.

David Robertson