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Commercial Bridge Loans: A Stopgap Real Estate Financing Solution
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What are commercial bridge loans?
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
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.
Commercial bridge loans amounts, terms, rates, and fees
Now that you understand the basics of how a commercial bridge loan works, let’s dive more into the nitty-gritty details.
In most cases, commercial bridge loans are big. Many lenders start their commercial bridge loans at $1 million, and they only go up from there.
Note, though, that your loan amount will be directly tied to the collateral you offer. Most bridge loan lenders will give you up to 80% of the collateral value.
Since it’s meant to bridge a lending gap―not to be a long-term financing solution―commercial bridge loans usually have much shorter terms than other commercial real estate loans.
A typical commercial bridge loan has a one-year term, with some bridge loans going up to three years. A conventional commercial mortgage, on the other hand, usually has a term between 15 and 30 years.
Commercial mortgage bridge loans have much higher rates than other commercial real estate loans do. That’s why most borrowers plan to refinance (or pay off) their bridge loans as quickly as possible.
Lenders often start commercial bridge loan rates in the high single digits (9% is common). For comparison, many commercial mortgages have interest rates under 5%.
Bridge loans often come with large origination fees―up to 6%. (As you can see, bridge loans aren’t meant to be the cheapest option out there.)
On the other hand, most commercial bridge loans don’t have prepayment penalties. After all, you usually get a bridge loan intending to pay it off ASAP (often by refinancing).
Some bridge loans do have prepayment restrictions―you can’t pay it off in the first six months, for example. But traditional prepayment penalties are rare.
If you find a bridge loan that does have prepayment fees, that’s probably a red flag. Do some careful math before you accept a bridge loan offer with prepayment penalties.
Qualifying for a commercial bridge loan
Unlike other short-term working capital solutions (like invoice financing, merchant cash advances, and microloans), commercial mortgage bridge loans aren’t the easiest to qualify for.
You don’t need perfect credit to get a bridge loan, but in most cases, you’ll need at least a 650 FICO score if you want to be competitive.
That means you may be able to get a loan with just a “fair” credit score. But if you have a poor personal credit score, you’ll probably need to find different funding.
Revenue and debt load
Each bridge loan lender has its own revenue requirements. As a rule, you’ll need a very healthy, profitable business to qualify for bridge loans. They’re not usually right for startups that haven’t broken even yet.
But something just as important as your revenue is your business’s debt load. If you’ve got a high amount of revenue but you also have a ton of business debt, lenders might think twice before giving you a bridge loan.
Now, that doesn’t mean you can’t have any debt. Plenty of businesses get bridge loans when they already have a commercial mortgage. But if your ratio of debt to profit is too high, you could have some trouble.
Collateral is a very important piece of the bridge loan puzzle. Pretty much all commercial bridge loans get secured with collateral. And as we mentioned above, your collateral determines what size commercial bridge loan you get.
In most cases, the collateral for bridge loans is other real estate you own.
Is a commercial bridge loan a good idea?
As we’ve explained the ins and outs of commercial bridge loans, you’ve probably realized that they’re not right for everyone. But how do you know if bridge loans are right for you?
Well, commercial bridge loans work best in situations where you know you have money coming in, if you can wait just a while. So if you know you can renovate and then sell that office building, or you know that you’ll be able to rent those apartments you’re building, a commercial bridge loan might be the right choice.
Likewise, you need to have a good idea of what you’ll do next. Will you simply pay off the bridge loan in its entirety? Will you refinance the loan? Remember, bridge loans―with their high interest rates―are a short-term solution. Before you get one, you need to have a long-term plan.
FAQs about commercial bridge loans
What banks offer bridge loans?
While many of the big banks offer personal bridge loans, far fewer offer commercial bridge loans. So if you want to go with a traditional lender, your best bet is to ask around at local banks and credit unions.
Or, of course, you can go with an online lender. Bloomfield Capital and Clopton Capital are two popular commercial bridge lenders.
What is a multifamily bridge loan?
Multifamily bridge loans are a specific subset of commercial bridge loans, meant for use on multifamily property projects (such as apartment buildings).
How risky is a bridge loan?
There’s always some amount of risk with a bridge loan. If you know you’ll be able to use your loan as intended and then refinance it, there’s probably not too much risk.
But of course, unforeseen problems (from asbestos to a market crash) can always complicate the best of plans. And if you go in without a clear plan of what you’ll do long-term, then bridge loans get much riskier.
As always, we suggest you think carefully and do lots of math before you borrow.
So is a bridge loan a bridge worth crossing?
With high interest rates and short terms, commercial bridge loans aren’t right for every business real estate need. Before you get one, you’ll want to consider how you’ll use it, how you’ll repay it, and what permanent financing solutions you’ll use in the future.
But with a careful plan in place, commercial bridge loans can allow you to move quickly and bridge the gap until you can get lower-rate financing.
Do the math on your next commercial real estate loan with our commercial loan calculator.
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