Commercial bridge loans act as a conduit by helping a business bridge the gap between meeting current financial obligations and securing a permanent source of financing at a later date. They are generally meant for short periods of time, since their intention is to help the company fulfill its financial obligations before another viable source of commercial financing becomes available. These loans are also known as swing loans or interim loans. The lender generally insists on clarity as far as 'exit strategy' is concerned. Exit strategy is the means by which a lender can hope to recover the amount of money lent. The absence of an exit strategy will disqualify a borrower from obtaining a loan. These loans also carry a higher rate of interest than permanent loans. Generally, the borrower would need to pay 3 to 4% more as interest on a bridge loan as compared to a permanent loan. Commercial loans typically carry no prepayment penalty.
Eligibility for a Commercial Loan
The borrower needs to provide the lender with a clear exit strategy.
In case the borrower needs the money for a new venture, he has to convince the lender about the viability and profitability of the proposed business, by providing details of the expected revenue and cost structure.
If the money is for an already established business, the borrower would need to present detailed financial statements indicating the profitability and the cash flow situation of the business.
A loan to value ratio of 70 to 90% would also be required.
For bridge loans that are secured by the assets of a business, the repayment period is generally 5 years.
Unsecured commercial loans have a repayment period of 6 months.
A good debt service ratio (net operating income to total debt service) is also desirable.
Types of Commercial Bridge Loans
Commercial Property/Mortgage Bridge Loan: These loans are typically borrowed for the purpose of buying a new property. Many a time, a businessman may be interested in new property and would like to close the deal at the earliest. The new purchase would be financed by selling off the old property. However, the latter deal would take a few months to finalize. Bridge loans became popular because most lenders were unwilling to provide a loan in order to finance a new purchase when the old property was up for sale. The loan providers may not expect interest payments for a few months. They are provided for a period of 6 months to 1 year, although, most lenders may allow the borrower to extend the period of the loan for up to 1 year, by paying an additional fee.
Commercial Construction Bridge Loans: This is a type of construction loan meant for the purpose of providing temporary finance for a new construction, or for making improvements on an already existing structure, in order to enhance the available cash flow from the property.
Fractured Condo Scenario: Some lenders may be willing to provide loans in case of fractured condos. Generally, a builder constructs an apartment complex with an intention to sell the apartments. Sometimes, due to the unavailability of buyers, the builder is forced to rent out most of the apartments. Such a condominium complex is known as a 'fractured condo'. Since the builder's ultimate intention is to sell the condos, he might approach a lender in order to obtain temporary financing in the form of bridge loans. Of course, the lender charges a very high rate of interest due to the extent of risk involved.
America's Recovery Capital Loans (ARC Loans): Since 16th June 2009, the US Small Business Administration (SBA) has started accepting applications from small business enterprises for bridge loans. These loans are meant for well established companies, which were profitable before the start of the recession. The recession might have resulted in reducing their customer base, working capital, and employees. Loss of ability to restructure existing debts, increase in costs, and reduction in suppliers, will also qualify the firms for loans, since the aforesaid issues would negatively impact the ability of a business to tide over difficult times.
These loans are generally paid off by opting for a permanent source of financing. In case of commercial property, the sale of the old property may help repay the loan. These loans are only available for firms which have a good operating history, or new firms engaged in highly profitable projects. Delinquencies will definitely disqualify firms from obtaining commercial loans. This is especially true for companies desiring commercial bridge loans. Such firms might be forced to opt for 'hard money financing', which carries a very high rate of interest. The credit worthiness of a borrower is inconsequential in case of such loans. These 'last resort' loans, which are secured by the value of the property, have a loan to value ratio of 50%.
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