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When trying to determine the perfect financing plan for your project, the options can be overwhelming. Commercial bridge loans are a great option for those looking for short-term financing to fund a real estate project, but there is a lot more that goes on behind the scenes.
In this blog, we will discuss what you need to know about commercial bridge loans, including…
- How they work
- Reasons to get a commercial bridge loan
- What to look for in a loan
- How to get the best interest rate
- Where to get a commercial bridge loan
So, let’s get started.
1. What Exactly Is A Commercial Bridge Loan?
As mentioned above, commercial bridge loans are used for short-term financial solutions for real estate projects. These types of loans are not permanent financing solutions, but rather bridge loans provide borrowers a short cut to access the capital they need.
More often than not, the real estate property is used as collateral to secure the financing, and the quality of the property will determine if you can qualify for the loan. Now, we will dive deeper into how these loans actually work.
How Do They Work?
When dealing with the commercial real estate, the lender generally takes on more risk because the loan is contingent upon the future value of the property. The short-term financing can be secured in a matter of days or weeks depending on the lender, so the borrower can quickly seize the real estate opportunity.
The loan amount is contingent upon the lender’s property evaluation, which is assessed by the loan-to-value (LTV) or loan-to-cost (LTC) ratio. Typically, the offer will be equivalent to around 70% to 80% of the appraised property value.
Banks, private lenders, and online lenders are the ones who normally distribute commercial real estate bridge loans. Depending on the source of the loan and the property value, interest rates will usually vary anywhere from 7% to 11%.
2. Reasons To Get a Bridge Loan
As mentioned above, bridge loans are great for short-term financing of commercial real estate. Moreover, you can get a bridge loan for residential, industrial, multi-family, retail properties, and more.
Suitable Scenarios for Commercial Bridge Loans
Since there are a number of reasons why a borrower might need a commercial bridge loan, we will go over a few scenarios that this loan might be best suited for.
Finance a Renovation For Value Addition
When a commercial real estate property is renovated or extensions are made, it adds value to the property. This makes the properties more attractive for prospective buyers and tenants. So, with the financing of the commercial real estate bridge loan, investors and developers can use that capital to improve the property and add value.
Fund a Commercial Real Estate Investment
One of the main benefits of a commercial bridge loan is how it provides fast access to liquid capital, so the investor can take a stake in the property as quickly as possible. This is advantageous because investors can miss out on good business opportunities and investments without the liquidity needed for the property.
Need To Overcome a Poor Credit Score
There could have been many factors that contributed to a company’s poor credit score, but unfortunately this may limit its ability to secure a long-term loan. Without good credit, a business may struggle to get the financing it needs to succeed with future investments.
A commercial bridge loan can help an organization begin earning strong revenues. Over time, this will demonstrate the company’s ability to secure longer term financing, which will subsequently help them establish a better credit score. These loans are also beneficial for foreign investors who might not have credit reports in the United States.
3. What To Look For in a Commercial Bridge Loan
When trying to determine the right loan for you, there are a few main factors that should be considered. Obviously, the expedited financing process is what leads many borrowers to choosing a commercial bridge loan, but let’s dig a little deeper into what you should look for in this type of loan.
Financing Schedule
Keep in mind that the time required to get the funds you need is probably the most important factor for your project. You should look for a loan that fits your needs and the schedule of the project or development. Traditional banks, for example, usually have a delayed loan application process, so you might want to consider looking elsewhere for a commercial bridge loan.
Prepayment Terms
You should also consider the lender’s prepayment incentives if they have any. In the case of a short-term loan like this, you will want to pay it off early if it is amortizing. That way, you can avoid paying interest and save money. However, some lenders might have a prepayment penalty for paying the loan off earlier than expected, so it’s important to assess the loan terms ahead of time.
Find the Best Interest Rate
When shopping around for a commercial bridge loan, it is beneficial to get quotes from multiple lenders. Although a lender may present you with a great interest rate, you may have to pay a significant amount in the future closing costs. So, make sure you inquire about the closing costs before entering an agreement.
There are also a couple ways to get a great interest rate on your commercial bridge loan. Making a higher down payment can help you secure a better interest rate because it reduces the amount of risk for the lender. Also, increasing cash assets can help lower the interest reserve and decrease the lender’s risk.
4. Where You Can Get a Commercial Bridge Loan
As mentioned before, banks, private and online lenders, and credit unions are all possible options for securing commercial bridge loans. Before making your final decision, be sure to assess all of the loan components that we mentioned to get the best deal.
If you’re not sure where to start looking, Livvy Corp is here to help. We offer bridge loans for any commercial, hospitality, multifamily, single-family, condominium, or townhome property. Let us bring your project to life by securing the capital you need to succeed.
