Before we define commercial bridge loans specifically, let’s take a second to talk about bridge loans more generally.
A bridge loan is any type of short-term loan that a borrower uses to cover the period of time before they can secure other financing.
So what does that look like? Let’s say you’re selling your current house and buying a new one. You’ve found the perfect home, and you don’t want anyone else to snatch it up while you’re waiting for your other house to sell.
Rather than wait to get a traditional mortgage, which can easily take a month or two, you might get a bridge loan of some sort―a loan that has higher fees but a faster funding time. You use that loan to buy your new house.
Then, once your old house has sold (woo!) you can refinance the bridge loan with a traditional mortgage―complete with a low interest rate―perhaps using the sale proceeds as a down payment.
In other words, the bridge loan bridges the gap between your financing needs and the time you can get a better loan. Hence the name.
So what about commercial bridge loans?
Commercial bridge loans usually refer to a specific type of commercial real estate loans. As in the above example, these loans get used as a short-term solution until a business owner can get better financing.
Most commonly, commercial bridge loans get used by real estate investors that flip or build on properties.
Say a contractor wants to buy and improve some old condos. In their current condition, the condos probably won’t qualify for a mortgage. So in order to buy the investment property and pay for the renovations, the contractor gets a bridge loan. Once they’ve successfully improved the condos, they can qualify for a proper commercial mortgage (with the condos as collateral).
A construction company might have a similar experience. It wants to buy land to build on, but it can’t get a mortgage for an empty lot. A bridge loan can give it the money to buy and build on the land. Once the buildings are up, the loan can be refinanced.
Sometimes, a business uses a bridge loan when they want to snap up a property before someone else does (like a great office space in a hot real estate market). A conventional commercial mortgage would take too long, so they might use a commercial bridge loan to hurry up the process―always planning to refinance later.