Sometimes small business owners find they need money fast to repair or improve a commercial property or to hold them over until they find a new tenant or can sell the property. In these cases, bridge loans could be the answer.
Bridge Loan Basics
A bridge loan is a short-term loan that gives commercial property owners the capital they need to take care of immediate financial needs having to do with the property. A typical bridge loan’s terms range from six months to a year, although some lenders provide the option of an extension if the borrower pays an additional fee.
Benefits and Drawbacks
Like any type of financing, bridge loans have advantages and disadvantages. Because they are short-term loans, there are usually no prepayment penalties, which means you are free to pay off your loan as soon as you can to save money on interest. However, also because the terms are so short, their monthly payments are more expensive in order for the borrower to pay back the full amount by the time the term is over.
Another advantage is the ability to choose when you pay back the loan. If you choose to pay it back before you secure permanent financing, the lender will structure payments so that you repay over time. If you make all payments on time, a bridge loan will significantly raise your credit score. If you choose to pay back the loan after you’ve secured permanent funding, you use a portion of that funding to pay the bridge loan back in full. Unfortunately, permanent financing sometimes falls through. If this happens to you, paying back the loan will be harder, especially because you will have to pay out of pocket if you chose to repay using permanent financing.
How to Secure a Bridge Loan
When it comes to applying for bridge loans, you have several options. If you have an excellent credit history, your bank may supply the money you need. If your bank isn’t likely to provide the funding you need, you can apply for the loan through an opportunity fund. A hard money bridge lender is an option for people with poor credit or little experience with commercial real estate.
Bridge loans are a good choice if you need fast funding for your commercial property and if you are sure you can pay them back on time. As with any big financial decision, be sure to weigh the pros and cons before moving forward.