A bridge loan is a short-term loan. Pending arrangement of larger or longer-term financing, bridge loans use borrowed private funds for one month to three years. Until permanent or the next stage financing is secured, for an individual or business entity, a bridge loan is a practical source of interim financing. From this financing, money is routinely used to ease other immediate capitalization needs.
Because of higher interest rate, points and other shorter amortized costs, bridge loans are typically more expensive than conventional financing. To compensate, for the added risk, lenders may need cross-collateralization and a lower loan-to-value ratio. Moreover, with little supporting documentation, these loans are arranged, under written and funded.
To close on a property, bridge loans are used for commercial real estate purchases to retrieve real estate from foreclosure or take advantage of a short-term buy opportunity. With a traditional long-term bank lender, when specific improvement or change that allows a permanent or later round of mortgage financing to occur, bridge loans are typically re-paid.
A bridge loan is likened to and overlaps with a hard money loan. For instance, both are non-standard loans obtained to discuss short-term or other unique lending dynamics. Still, the difference with hard money is most identified by the lending source; as in individual, investment pool, private lending entity or bank not in the business of making high risk and higher interest loans. A bridge loan addresses temporary disposition of a capital infusion loan. Furthermore, this temporary disposition is affected by project phases, tranche schedules (with differing capital needs, risk profiles and availability of funding).
Because of the speculative nature, lack of full documentation, other less known factors; and elements that do not wholly fit conventional lending criteria, most traditional banks do not offer real estate bridge loans. Why? Conventional lenders would have difficulty justifying its lending practice to investors and government regulators. Thus, bridge loans come from individuals, investment pools and other private equity business. These entities make a practice of lending higher-interest loans and have less financial oversight.
Most bridge loans are typically asset-based and backed by collateral; as in real estate, equipment or inventory. Until long term permanent financing is secured or until cash is injected to pay off loan, lenders look for a workable exit strategy. Exampled use of bridge loans include: a) buy an income producing real estate property, such as a multi-family or commercial building; b) secure and renovate an existing commercial building for re-lease at higher rates; c) business working capital required to prepare for expansion, another financing event or build inventory; d) carry company through an interim period before a first public offering (IPO) or an acquisition; and e) support sale options (where rapid closings are required).
Invariably, unlike a traditional long-term commercial loan, the premise of a bridge loan is acts as an easier path to funding. Bridge loan financing is used for creative situations; as in expedited closings, distressed borrowing (to avoid credit or bankruptcy litigation). Moreover, within commercial and residential real estate, this bridge to stabilization, opportunistic purchases, construction completion and other unique circumstance(s) serves the capital infusion needs of long-term buyers, investors and speculators.