The process of a commercial bridge loan is similar to that of other business loans. A lender is required to approve the application of the business owner. Once they have provided all necessary documentation and information, funding can be received quickly, sometimes within days.
Before approving an applicant’s application, the lender will look at several factors. We’ll go into more detail in a subsequent section. The lender will consider the loan-to-cost (LTC) for now. LTC refers to the maximum amount that a lender will lend to borrowers. LTC can range from 70% to 80% for most lenders.
Let’s take an example. Property is being purchased at $100,000. The lender will offer you a bridge loan for 80% LTC. The lender will give you an $80,000 loan, and you will need to pay the remainder of $20,000.
The terms and rates for your bridge loan will be set by the lender (more details later). After your loan approval, funds will be disbursed to you so you can complete your purchase. You would pay the same amount if you purchased the property in the above example until you get a mortgage or another long-term financing that covers the principal, interest, and fees.
It is important to remember that loan funds are secured by collateral. This means that if you fail to repay the lender as agreed, the lender can seize the property and sell it to recover its losses.
The typical terms of a bridge loan
Bridge loans are short-term, temporary solutions to cash flow problems. Most bridge loans are repayable in one year. While some lenders might offer bridge loans with longer terms than one year, these are generally less than two years. Most bridge loans can be paid off in a matter of months. This gives you sufficient time to obtain permanent financing.
Are Commercial Bridge Loans Right for Your Business?
A commercial bridge loan may not be the best choice for every company. How can you decide if your company will benefit from a commercial bridge loan? Here are some things to keep in mind.
Consider why you are in need of funds. A commercial bridge loan is not the right fit if you need a long-term solution to cash flow problems. If you have one of these reasons and need money, talk to a lender.
- Get a deal done quickly – If the real estate market heats up, it’s important to act quickly or you will be left behind. It can take weeks to get a long-term mortgage or a loan. By then, you might have lost out on a buyer. A commercial bridge loan is a way to quickly purchase commercial property. It allows you to borrow enough money to get another source of financing.
- Get Credit Reputation – Are you unable to get a mortgage or bank loan because of your credit? A bridge loan might be the best option if your credit is not good enough to get a mortgage or a bank loan. Bridge loans are a great option if you have to purchase now, but need to improve your credit score (e.g. paying off debts or disputing incorrect information on your credit reports).
- Acquire a Business – Time is critical if you are looking to buy another business. A bridge loan is a quick way to get funding.
Renovate Your Property- A bridge loan is a great way to get your business up and running quickly to attract new customers.