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 even longer to fund. That time-lapse can mean you don’t get to jump on an opportunity since you don’t have the money to make the purchase.
That’s where commercial bridge loans can really shine. They provide the capital you need to buy real estate and can “bridge the gap” until you secure longer-term financing.
What is a Commercial Bridge Loan?
A commercial bridge loan is a type of loan that, as I said, bridges the gap between financing. They aren’t traditional bank loans, but rather short-term financing meant to be repaid in a few months or a year.
Commercial bridge loans are often used by investors looking to buy commercial property and may be offered by banks, online lenders, or hard money lenders (private lenders).
How Do Bridge Loans Work for Commercial Properties?
The biggest feature of commercial bridge loans is that they require collateral to secure, usually the property you’re buying. A lender will assess the value of the property you’re purchasing, looking at the loan-to-value ratio (LTV), and offer a loan of up to 80% of that value. You’ll be responsible for the rest.
Bridge loan applications are usually processed quickly, which is a plus, though they do come with the drawback of higher interest rates and shorter repayment periods. There may also be more fees than you’d see with traditional commercial mortgages.
When to Use a Commercial Bridge Loan
So when should you consider a commercial bridge loan? Common uses include purchasing real estate, buying inventory, or covering gaps in cash flow.
Purchasing Real Estate
A commercial real estate bridge loan is most often used to purchase investment property like a mixed-use space, multifamily apartment building, or office building. Because you know you will be able to generate profit in the short term, taking on a loan with high interest for a few months may make sense, because you can quickly pay it off or take out a longer-term loan to cover it.
When you sell products, you need cash to buy inventory…but you need the cash you’ll make from selling it to pay for the inventory! It’s a Catch-22, but a bridge loan can provide you the capital you need to buy the inventory, and once you sell it, you can pay off the loan.
Covering Gaps in Cash Flow
Your business may be seasonal, meaning you make most of your money in one season and then have stuttering cash flow the rest of the year. A bridge loan can ensure you have the capital you need to cover bills during these slow periods.
Bridge Loan Interest Rates and Fees
As I said, a short-term loan like a bridge loan comes with higher interest rates than traditional loans, as well as other fees. Interest rates range from 8.5% to 10.5%, though they may be much higher, depending on your qualifications.
In addition to the Interest rates you’ll pay on the loan amount, you may also have to pay an origination fee and other administrative fees. If you want to pay the loan off early, there may also be a prepayment penalty. Read the fine print before signing for a bridge loan, and make sure you’re okay with the extra expense.
What is the Maximum Term Allowed for a Bridge Loan?
Borrowers have relatively little time to pay off such a large loan. Most bridge loans are for six months, and at most, twelve months. That means you need to have a plan for how you will pay off the loan and secure more long-term financing by the end of that period.
How to Qualify for a Commercial Bridge Loan
Qualifying for bridge loan financing may be similar to what you’d need to qualify for other types of loans, though your collateral will play a much bigger role here.
Exact qualifications vary from one lender to another. They’ll look at your credit scores, both personal and business. If you haven’t yet learned how to establish business credit, now’s a good time to do so, so that you qualify for the loan you want.
The loan amount you qualify for will depend on that LTV (value of the property you put up for collateral). Lenders may also look at your annual revenues to determine eligibility.
What to Look For in a Commercial Bridge Loan
Financing options that offer the turnaround time that commercial bridge loans offer will cost more, though you can shop around to find the best price on this interim 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 how you’ll swing to the next vine of long-term financing. Plan at the start to apply for a longer-term loan so that you can refinance your commercial bridge loan as soon as the permanent financing is in place.
Look for a lender that has a solid reputation for positive customer service, fast loan application processing, and lightning-fast funding.
Top Lenders for Commercial Bridge Loans
Let’s look at a few bridge loan lenders who may be able to help you with your financing needs.
As a nationwide provider of commercial mortgage bridge loans, Stratton Equities provides financing of $200,000 to $5 million, with rates starting at 7.25%. Repayment terms are longer than most bridge loans offer: you can repay your loan for up to two years.
While it’s not technically a bridge loan program, Credibility Capital’s intermediate-term loan can get you up to $500,000 that you repay over one to five years. Rates start at 6.99% and there are no prepayment fees or other hidden fees.
AVANA Capital is another option for commercial bridge financing. These loans can be used for acquisitions, real estate purchases or improvements, or debt consolidation, among other uses, and you’ll have between 12 and 36 months to repay it.
Nav’s Verdict: Commercial Bridge Loans
You shouldn’t have to miss out on investment opportunities just because you don’t have the cash on hand to buy commercial real estate. A commercial bridge loan could be just what the doctor ordered: you’ll get the cash you need while you make more long-term arrangements for financing.
This article was originally written on March 17, 2022 and updated on March 21, 2022.