Here’s What You Need to Know About Commercial Bridge Loans

You’re looking to expand your business into a bigger location, and the perfect property has just come on the market. It’s beautiful, and it’s in a prime location with lots of foot traffic. It won’t stay on the market long. But you don’t have the cash to make an offer.

You should consider a commercial bridge loan. A bridge loan can give you the cash you need to take advantage of the opportunity in front of you, and then once you’ve conducted your real estate deal, you can take out a traditional commercial real estate loan to pay off the bridge loan. Or maybe you need cash to make payroll and other operating expenses while you wait for a big sale to finalize – you could get a bridge loan for that, too. Here’s what you need to know about this business funding option.

A Commercial Bridge Loan Can Offer a Quick Cash Infusion

Bridge loans are generally perfect for when you need cash fast. Some direct lenders can approve your bridge loan within just three days, while some online lenders can approve your application in just one day. They’re meant to “bridge the gap” between you and your next source of cash, whether that’s final payment on a sale you’re in the middle of or securing more traditional financing. Many lenders allow you to customize your loan structure with repayment terms as long as three years.

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You Will Need to Put Up Collateral

Just like most loans, you will need to put up collateral for a business bridge loan. If you’re using the bridge loan to buy real estate, that real estate will likely serve as the collateral. If you’re getting a business bridge loan to cover the cost of operating expenses while you wait for a deal to close, you can use your business premises, equipment, or even your invoices as collateral. 

Most lenders are going to be willing to give you 65 to 80 percent of what your collateral is worth. This is known as the loan-to-value (LTV) ratio. If you’re financing construction or renovation, your lender might be willing to lend you a percent of what the project is going to cost, known as the loan-to-cost (LTC) ratio. The higher your LTV or LTC, the riskier the loan is for the lender. 

You Should Have a Plan to Pay Off the Bridge Loan

You’re meant to use business bridge loans as a temporary financing solution when you either don’t have time to get approved for a traditional loan, as might be the case if you’re trying to snap up some choice real estate, or when you can’t get approved for a traditional business loan for your needs for one reason or another. For example, if you’re building new real estate, you’ll probably need to use a bridge loan to cover the construction, and then you can either sell the building and pay off your bridge loan using the proceeds, or get a long-term commercial real estate to pay off the bridge loan.

Bridge loans are typically short-term loans, so you should always have a plan to pay your bridge loan off. If you’re buying real estate, maybe the plan is to secure long-term financing once the property is bought, or to fix the property up, sell it, and use that money to pay off the bridge loan. Maybe you need capital for operating expenses while you work on closing a deal, and you’ll be able to pay off the loan when your deal comes through. It doesn’t matter what the plan is, as long as you have one.

Know Where to Go for a Fast Bridge Loan Approval

If you need to get a bridge loan fast – and what is the point of getting one at all if you’re not getting it fast – you should go to a direct lender or an online lender. Banks and credit unions do sometimes give bridge loans, but not always. Direct and online lenders may be able to get you funding in less than three days. That way, if you want to jump on an opportunity or simply need capital in a hurry to meet costs, you won’t have to wait.

Commercial bridge loans are a great solution when you need money to take advantage of a passing opportunity or just to cover costs while you work on closing a deal or securing more permanent financing. Don’t discount the potential of a bridge loan to make or break your business.