The problem for commercial real estate investors looking for small business loans is that many long-term loan applications take a while to process, and funding takes even longer. This time lapse can mean that you miss an opportunity because you don’t have the money to make the purchase.
This is where commercial bridging loans can really shine. They provide you with the necessary capital for the property purchase and can “build bridges” until you have secured long-term financing.
What is a commercial bridging loan?
A commercial bridging loan is a type of loan that, as mentioned, bridges the gap between financings. These are not classic bank loans, but short-term financing that should be repaid in a few months or a year.
Commercial bridge loans are commonly used by investors looking to buy commercial real estate and can be offered by banks, online lenders, or coin lenders (private lenders).
How do commercial real estate bridging loans work?
The biggest feature of commercial bridging loans is that they require collateral to secure them, usually the property you are buying. A lender will assess the value of the property you have bought based on the loan to value (LTV) and offer a loan of up to 80% of that value. You are responsible for the rest.
Bridging loan applications are usually processed quickly, which is a plus, but comes with the disadvantage of higher interest rates and shorter repayment periods. Fees can also be higher than traditional commercial mortgages.
When to use a commercial bridging loan
So when should you consider a commercial bridging loan? Common uses include buying real estate, buying inventory, or filling liquidity gaps.
Buying real estate
A commercial real estate bridge loan is most commonly used to purchase an investment property such as a mixed-use building, apartment building, or office building. Knowing that you can make short-term gains, taking out a high-interest loan for a few months can make sense as you can pay it off quickly or take out a longer-term loan to cover it.
When you sell products, you need cash to buy inventory… but you need the money you make from sales to pay for inventory! It’s a Catch-22, but a bridging loan can provide you with the capital you need to purchase the inventory, and once you’ve sold it you can repay the loan.
Close liquidity gaps
Your business can be seasonal, meaning you make most of your money in one season and then have stuttering cash flow the rest of the year. A bridging loan can ensure you have the capital you need to cover bills during these down times.
Interest rates and fees for bridging loans
Again, a short-term loan like a bridging loan comes with higher interest rates than traditional loans, as well as other fees. Interest rates range from 8.5% to 10.5% but can be significantly higher depending on qualifications.
In addition to the interest rates you pay on the loan amount, you may also have to pay a processing fee and other administrative fees. If you want to repay the loan early, there may also be a prepayment penalty. Before you sign a bridging loan, read the fine print and make sure you’re okay with the additional costs.
What is the maximum allowable term for a bridging loan?
Borrowers have relatively little time to repay such a large loan. Most bridging loans have a term of six months and a maximum of twelve months. This means you need to have a plan on how you will repay the loan by the end of that period and secure longer-term funding.
How to qualify for a commercial bridging loan
Qualifying for bridging loan financing can be similar to what you need to qualify for other types of loans, although your collateral will play a much larger role here.
Exact qualifications vary from one lender to another. They look at your credit score, both personal and business. If you haven’t already learned how to set up a business loan, now is a good time to do so so you can qualify for the loan you want.
The loan amount you qualify for depends on this LTV (value of the property you have provided as collateral). Lenders can also look at your annual earnings to determine eligibility.
What you should look out for with a commercial bridging loan
Financing options that offer the processing time that commercial bridging loans offer cost more, although you can shop around to find the best price for this bridging financing for your next investment property.
Your monthly repayment amount will be high, so make sure you can afford it.
The most important thing is to have a plan for moving to the next rank of long-term financing. Plan to apply for a longer-term loan at the outset so that you can refinance your commercial bridging loan once permanent funding is in place.
Look for a lender that has a solid reputation for positive customer service, fast loan application processing, and lightning-fast financing.
Top commercial bridging loan lenders
Let’s look at a few bridging loan lenders that may be able to help you with your financing needs.
A nationwide provider of commercial mortgage bridging loans, Stratton Equities offers financing ranging from $200,000 to $5 million with interest rates starting at 7.25%. The repayment periods are longer than with most bridging loans: you can repay your loan in up to two years.
While not technically a bridging loan program, Credibility Capital’s term loan can net you up to $500,000, which you’ll pay back over one to five years. Prices start at 6.99% and there are no upfront fees or other hidden charges.
AVANA Capital is another option for commercial bridging financing. These loans can be used for acquisitions, property purchases or improvements, or debt consolidation, among other things, and you have between 12 and 36 months to repay them.
Verdict by Nav: Commercial Bridging Loans
You shouldn’t miss out on an investment opportunity just because you don’t have the cash to buy commercial real estate. A commercial bridging loan could be just what the doctor ordered: you get the money you need while making longer-term financing arrangements.
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