Commercial bridging loans are short-term loans designed to help a company do before a permanent funding source becomes available.
Commercial bridge loans act as a channel by helping a company to bridge the gap between fulfilling current financial commitments and securing a permanent source of funding at a later date. They are generally intended for short periods of time, as their intention is to help the company meet its financial commitments before another viable source of commercial finance becomes available. These loans are also called swing loans or temporary loans. The lender generally insists on clarity as far as “exit strategy” is concerned. Exit strategy is the way in which a lender can hope to recover money lent. The absence of an exit strategy will disqualify borrowers from obtaining a loan. These loans also bear a higher interest rate than permanent loans. Generally speaking, the borrower would have to pay 3-4% more as interest on a transition loan compared to a permanent loan. Commercial loans normally carry no advance payment penalty.
Authorization for a loan
The borrower must provide the lender with a clear exit strategy.
In case, the borrower needs money for a new venture, he must convince the lender of viability and profitability for the proposed business, by providing information about the expected revenue and the cost structure.
If the money is for an already established business, the borrower would have to present detailed financial reports indicating the profitability and situation of the business cash flows.
A loan-to-value ratio of 70 to 90% would also be required.
For bridge loans that are secured by the assets of a company, the repayment period is usually 5 years.
Unsecured commercial loans have a repayment period of 6 months.
A good debt service ratio (operating surplus to total debt service) is also desirable.
Types of commercial bridge loans
Commercial Real Estate / Mortgage Brew Loans
These loans are usually borrowed to buy a new property. Many times a businessman can be interested in a new property and wants to finish the deal at the earliest. The new purchase would be financed by selling the old property. But later the deal would take a few months to complete. Brew loans became popular because most lenders were reluctant to give a loan to finance a new purchase when the old property was for sale. The lenders cannot expect interest payments for a few months. They are provided for a period of 6 months to a year, but most lenders may allow the borrower to extend the loan for up to one year by paying an additional fee.
Commercial Construction Bridge Loans
This is a type of construction loan intended to provide temporary financing for a new construction, or to make improvements to an already existing structure, in order to increase the available cash flow from the property.
Broken Condo Scenario: Some lenders may be willing to provide loans at shattered condoms. In general, a builder constructs an apartment complex with the intention of selling the apartments. Sometimes due to lack of buyers, builders are forced to rent most of the apartments. Such a villa complex known as a “fractured apartment”. Since the builder’s ultimate intention is to sell apartments, he can turn to a lender to obtain temporary financing in the form of bridge loans. Of course, the lender takes a very high degree of interest because of the extent of the risk.
US Recovery Capital Loan (ARC Loan)
Since June 16, 2009, the US Small Business Administration (SBA) has begun receiving applications from small business loan companies. These loans are intended for well-established companies, which were profitable before the recession. The recession may have resulted in reducing its customer base, working capital and employees. Loss of ability to restructure existing debt, increase costs, and reduce vendors will also qualify companies for loans, as the aforementioned issues would adversely affect the ability of a company to stream during difficult times.
These loans are generally paid out by choosing a permanent source of funding. In commercial real estate, the sale of the old property can help repay the loan. These loans are only available to companies that have a good business history, or new businesses that deal with very profitable projects. Mismanagement will definitely disqualify companies from obtaining commercial loans. This is especially true for companies that want commercial bridge loans. Such companies may be forced to choose “hard money financing”, which carries a very high interest rate. The creditworthiness of a borrower is unimportant in such loans. These “last resort” loans, which are secured by the value of the property, have a loan to value the ratio between 50%.