Are you looking for quick access to capital? If you answered yes, then the best option for you is a bridge loan. As the name suggests, bridge loans are intended to “bridge the gap” until your business is able to qualify for a permanent, long-term financing solution. Homeowners, property developers, and businesses such as restaurants, retail shops, contractors, and hotels are frequent users of bridge loans.
What is a Bridge Loan?
A commercial bridge loan is similar to the bridge loans in real estate. The main difference is that it can fund a variety of short-term business expenses rather than just property. You can use bridge loans as you wait to receive long term funding for business expenses, like inventory or acquiring new opportunities.
Most banks and credit unions don’t offer bridge loans. You can apply for one from hard money lenders or alternative lending companies. If you qualify for a loan, you’ll be able to receive funding within a week. Some lenders even promise to wire you the money within 24 to 48 hours, given the fact that all goes smoothly.
Bridge loans commonly have a lifespan of 6 to 18 months and can charge slightly higher interest rates compared to other long-term loans. Here are four reasons why you should apply for one as well.
1. You can buy a property before an existing one is sold
A common reason why people apply for a bridge loan is, they know they will have access to capital, just not at the current time. They want to purchase another property but they are unable to do so because they still haven’t sold an existing property. You can use bridge loans to purchase the property you have your eye on. Then after the sale of your existing property, you’ll be able to repay the bridge loan.
2. Bridge loans offer speedy financing
Since a bridge loan is a short-term loan, it’s a quick and simple process to qualify for it as opposed to other forms of financing. This makes it easier for businesses to take advantage of discounted investment opportunities that may arise. Bridge loans also help businesses take advantage of limited-time offers to prevent them from missing out on an attractive business opportunity.
It’s important to choose experienced specialty lenders that are able to meet your financing and timing objectives. In fact, bridge loans can be funded in as little as 24-48 hours, and require very little documentation. This type of short-term loan enables businesses to acquire, stabilize, and renovate properties before securing a permanent, financing source.
3. When you purchase properties or need to bid at auctions
Properties purchased at auctions typically require a 10% deposit to secure the deal; with the remaining amount due within a specified time frame. Standard mortgage loans tend to take too much time before you receive the money, preventing you the buyer from securing the property. However, with a bridge loan, you can pay for the property while you wait for your mortgage approval. Once the mortgage is approved, you can then use it to repay the bridging loan.
In regard to bidding on new projects, many business owners are avoiding taking on larger projects, because they cannot support the amount of capital requested. A bridge loan, however, will allow a business owner to win the bid, finance the project and grow their business.
4. When unexpected tax bills arise
There are times when businesses receive unexpected tax bills or other expenses that arise, with many unable to pay the bill within the stipulated deadline. To avoid paying for penalty fees, a bridging loan is one of the most viable options to ensure the tax bill is paid.
5. If you need short-term working capital
In business, there are good days and there are not-so-good days. For instance, there can be a decrease in cash flow because of seasonal business fluctuations. Sometimes, businesses need short-term capital to run day-to-day operations. You can use bridging loans to buy inventory, equipment, make payroll, or for other business needs that may arise.
Are Bridge Loans a Right Option for You?
There are several factors you need to consider before you apply for bridge loans. You need to have great credit. Lenders prefer a low debt-to-income ratio and equity of at least 20%.
If multiple lenders approved your application, carefully review the terms of each proposal. Know the prepayment penalties, the hidden fees, as well as the payoff time offered by each lender. Some of them ask for monthly payments, while others ask for upfront or backend lump sum interest payments.
At the end of the day, you know what’s right for your business. If you think a bridge loan is what you need, research lenders in your area and prepare the necessary documents beforehand.