Bridge Loans are a short-term financing
Bridge Loans are a short-term financing option and are used while waiting for permanent financing, or the next stage of financing to be obtained. Bridge loans provide funding to "bridge" the gap between a company's current needs and their long term financing requirements.
One of the characteristics of a bridge loan is that they can close quickly, which in turn allows a company to capitalize on a timely business opportunity, or acquisition. The quick access to money can also allow a business the chance to avoid penalties, bankruptcy, or other temporary problems. If longer term issues need to be dealt with, this transitionary financing provides the company time until longer term financing can be secured.
Another characteristic of bridge loans is that the process usually requires less documentation than conventional financing. Bridge loan lenders don't usually have the same government regulations to adhere to, so they tend to have more flexibility in their lending criteria and the documentation they require. However, less documentation does not mean they won't perform due diligence to have a comfort level with the transaction before they fund.
Permanent financing is generally used to "take out," or pay back, the bridge loan. In the event the funds were used to buy real estate, the property may be rehabbed and sold to pay off the loan.
Uses of Bridge Loans
Acquisitions
Avoid penalties
Balloon Note Due
Bankruptcy Resolutions
Business Expansion
Foreclosure Avoidance
Investment opportunities
Mergers
Payoff Tax Liens/Judgments
Refinancing
Partner Buyouts
Renovations
Sale-Leaseback
Examples of using Bridge Loans:
1. An existing manufacturer needs $1 million to expand their business. They have 3 new equity investors who will be investing in the firm over the next 6 months, but at different intervals. However, the business has orders and needs to expand their facility and production line sooner than 6 months. The quick closing bridge loan allows the company access to the needed funds so they can complete their expansion and profit from the new orders. Money from the 3 new equity investors will pay off the bridge loan.
2. A business has an opportunity to quickly acquire a commercial property that has a great location but is in disrepair. A Hard Money Lender can provide a bridge loan until the rehab of the property is complete and conventional long term financing can be obtained.
3. A contractor needs funds to get through the permitting process of a project. Conventional financing isn't available at this stage because there is still too much risk. A bridge loan provides the needed funds and allows the contractor to move into the construction phase and then qualify for other forms of financing.
4. During a partner buyout a bridge loan can help ensure the cash flow and uninterrupted operation of the business until traditional funding takes place.
5. Property, or equipment bought at auction may have a narrow window for closing the deal and timing of traditional financing would keep the buyer from proceeding with the opportunity.
6. To meet the underwriting expense of going public, short term financing of a bridge loan allows the company to proceed with their IPO plans.
The types of deals that require this type of loan may be considered speculative in nature, or have higher risk factors. Due to this many banks do not offer these loans. Banks must meet government regulations and need to justify their lending practices. Riskier loans do not usually fall within the lending parameters of many banks. A majority of the these loans will come from private investment firms and hard money lenders.
When there are business opportunities, quick deadlines, an old loan maturing before a new loan can be put in place, funding needs during the permit, planning, or evaluating stages, etc., these loans can be an essential financial tool.
Tips:
1. These loans are quick to obtain, but quick to expire.
2. They are similar to a hard money loan and the terms are often used interchangeably in conversations. Both are short-term, higher interest rate, non-standard loans, but in some circles hard money refers to the lending source and a bridge loan refers to the duration of the loan.
3. These loans usually come with higher interest rates than traditional financing a larger down payment, meaning a lower Loan to Value (LTV) and a lower level of risk and provides an opportunity for lower interest rates. Lower LTV's represent a lower level of risk and may allow lower interest rates.
4. With the shorter time period, these borrowers will need to be aware that fees for valuations, legal, dues diligence, etc., will be amortized over a shorter period than traditional financing transactions.