Should a Commercial Bridge Loan Be Part of Your Financing Strategy?

A person uses a calculator to determine whether a commercial bridge loan would benefit a business

When it comes to real estate purchases or improvements, many small business owners find that they need fast access to capital. Some take on a short-term, collateralized loan known as a commercial bridge loan to meet this need while arranging a longer-term form of financing, such as a commercial mortgage, an SBA 504 loan, a term loan, or a round of equity financing.

 

Why would I pursue a commercial bridge loan?

Bridge loans can often be attained quickly and relatively easily, even for borrowers with less-than-perfect credit. Lenders tend to worry less about a borrower’s credit history and credit score, knowing they can seize the property that’s collateralized in the event of default.

Many small business owners who choose commercial bridge loans do so for one of the following reasons:

  • They want to move quickly on a property that’s sure to attract other investors’ attention.
    • The commercial bridge loan process is usually much shorter than the commercial mortgage process, so borrowers who take on a commercial loan can close on properties more quickly than prospective buyers using other forms of financing.
  • They need to boost their credit score before applying for a longer-term form of financing for a property.
    • Most lenders offer commercial bridge loans without much consideration to an applicant’s credit score. However, by attaining a loan and making repayments according to the terms the lender sets, borrowers can boost their credit score, possibly enough to become eligible for more favorable forms of financing.
  • They plan to purchase a new building and move their business to that location.
    • A commercial bridge loan can help small business owners cover the costs of their down payments, improvements to the new site, and the mortgage that remains on the location they’re exiting. Once their former location is sold, many small business owners are better positioned to take on a new commercial mortgage.
  • They need fast cash to renovate or make repairs to a property they already own.
    • Some small business owners may opt to make repairs or renovations to a building before applying for longer-term financing because those updates will increase the property’s value and make it more attractive for other forms of lender financing.
  • They need an injection of cash before an acquisition.
    • If a business has arranged for a new source of capital from another entity, it may qualify for the short-term financing of a commercial bridge loan.
  • They need to make a quick, sizeable purchase of inventory.
    • Sometimes, business owners need to move quickly to purchase inventory that’s offered to them at a discounted rate. In those scenarios, owners may consider a commercial bridge loan to access the fast cash they need to complete the purchase. They often refinance the bridge loan into a longer-term loan shortly thereafter.

 

In most circumstances, commercial bridge loans help borrowers raise money to cover impending asset costs, but they’re infrequently used for long periods of time.

 

Are these loans risky?

They can be. Collateralized loans can result in the loss of property if you’re unable to make timely loan repayments.

 

What are the terms?

The terms of a commercial bridge loan vary by lender. Here are some commonly used terms:

Loan amount

$1 million to $20 million

Interest rate

6-12% with a traditional lender
7-30% with an alternative lender

Loan terms

6-12+ months

Loan-to-value ratio (LTV) or after-repair value ratio (ARV)

70-80%

Fees

Fees are usually higher in commercial bridge loans than in other forms of loans. Those fees may include an origination fee, appraisal fee, escrow fee, and a title fee.

Repayment terms

Amortized loans offer fixed monthly payments.

Unamortized loans may include a one-time repayment near the end of the loan or small interest-only payments through the life of the loan with a balloon payment near the end of the term.

Note: Some well-qualified borrowers find lenders who offer options for interest-only payments or nonrecourse loans in which the borrower does not have to guarantee the loan. Both options can be attractive for borrowers with short-term cash needs.

If you decide to pursue a commercial bridge loan, you should inquire with several local or online lenders and compare their offerings across the factors mentioned above. Additionally, you should ask whether there are any prepayment penalties (a feature common to commercial bridge loans) and how long it will take to receive funding.

Interested in exploring other options? Learn more in our article, Your Go-to Guide to Raising Capital for Your Small Business, or click on the links from our Small Business Financing 101 series below:

 

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