How Does a Commercial Bridge Loan Work?
A bridge loan is a type of short-term loan that is usually given to a business to help it meet its financial obligations between two longer-term financing loans. The loans are usually used to cover capital shortfalls that can occur when the business needs to pay off one loan before a new loan-term loan is approved.
The loan provides the necessary financing when you need money fast. For example, if the company has to buy some assets but does not have the money to do so, a bridge loan can be secured to purchase the asset.
Types of Bridge Loans
There is no restriction on how you can use a bridge loan. Most companies use the loans to cater for mortgage or for operational capital. For instance, if the company’s mortgage loan on its premises is dues before the company finds a suitable replacement long-term mortgage loan, a bridge loan may be acquired to pay off the current mortgage. Form these, when the new long-term, loan is acquired, it will be sued to pay off the bridge loan.
In most cases, companies can acquire up to 80 percent of the value of residential property and up to 70 percent of the value of an investment property. Bridge loans interest rates are based on an index with a margin. This is usually the case with bridge loans, lines or credit and time notes. The loans have to be paid with interest, which is calculated based on the prevailing are on the outstanding principal balance of the loan.
In most cases, bridge loans are given for a short period. Most companies offer the loans for about six months. If you fail to pay back the loan over the repayment period, it will continue to accrue interest. Some lenders can extend your repayment period for a short time if you communicate with them early enough.
Requirements for Applying for Bridge Loans
To qualify for a bridge loan, you need to meet the requirements of the lender. Usually, you will have to pay an origination fee, which is about 10% of the amount you are borrowing. You will also have to provide copies of your financial statements and tax returns to prove that you can afford the loan payments.
You will also have to deposit a copy of the contract of sale as assurance that you will pay back the loan. If you are taking the loan to buy property, you must maintain hazards insurance. If the property is in an area that is prone to flowing, you will have to name the lender as loss payee or mortgagee.
Benefits of Bridge Loans
Generally, companies can qualify for bridge loans than for more long-term financing options. Lenders know that the loans are simply meant to offer short term relief as the business waits for its longer-term financing options. This also means that businesses are more willing to pay higher down payments or interest rates. When you need cash quick for your business, bridge loans are a good choice since they are easy and quick to be approved for than traditional long-term commercial financing.