A bridge loan is a short-term loan that is intended to "bridge" a gap between a current need for capital and the time required to set up a more permanent financing solution. While this type of loan tends to carry certain fees and a higher interest rate, it is not intended as a long-term solution. Used properly, a bridge loan can help a business to participate in a lucrative transaction that might be lost otherwise. While there is a real cost to be addresses and managed, this option should be considered under the right circumstances.
A Brief History
Bridge loans were originally proposed by non-traditional hard money lenders who had identified a gap in the market. While banks require weeks to months to perform thorough due diligence, many of the properties that were being bought and sold were changing hands quickly. This meant that only market participants with existing credit lines, or those with significant cash on hand could take advantage of attractive opportunities. Recognizing that this was inefficient and that good opportunities were being missed, these lenders began to offer bridge loans.
The reason that their rates are higher is that the lender is taking the most significant part of the risk continuum. Once the purchase or refinancing has occurred with a bridge loan, the clock starts ticking and if the borrower does not move quickly to exit the high cost commercial loan, it is unlikely that the senior lender or exit strategy will close the transaction. If permanent financing falls through, the bridge lender is left with the exposure and often times stuck with a non-performing property. This means that these projects tend to have a negative selection element; good loans are closed and given to a traditional lender, while lower quality loans (those that have difficulty securing permanent financing) remain open. In order to assume this level of risk, a bridge lender requires a higher rate.
Uses of Bridge Loan Financing - Property Types
Bridge loans can be used to aid in the acquisition or refinance several property types with a variety of business objectives. Top non-traditional lenders can aid investors in aggressively pursuing loans for land loans, apartment complexes, retail stores, office buildings, mixed use facilities, light industrial buildings, self storage warehouses, mobile home parks, gas stations, liquor stores, and many others. Each unique property presents a different set of challenges and different potential for cash flows. Locating proper bridge financing can help secure a lucrative opportunity and making it successful.
The real benefit to using bridge financing from a hard money lender, regardless of the specific property type is that the lenders who operate in this arena are well-versed in the potential success. By partnering with the right lender, you will be able to secure the capital needed to take advantage of a great opportunity, while still making certain that the risks being taken are appropriate.
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