What is a bridging loan and how can businesses use it?
A bridging loan is a form of short-term financing that aims to help a business meet its obligations until it obtains a long-term business loan. This type of business loan is commonly used in commercial real estate and other transactions where timing is of the essence and businesses need to raise funds quickly in order to take advantage of an opportunity.
When a business takes out a bridging loan, it uses the proceeds to purchase or improve assets or to finance its own operations. Then, once he has secured long-term financing, he uses the funds from the new long-term loan to pay off the bridge. Businesses use bridging loans (which often carry interest rates several points higher than conventional long-term financing) to fill short-term financing gaps. These include purchases of assets, such as real estate, equipment, and inventory.
5 common uses of bridging loans
|Use||Why a bridging loan is advantageous|
|Property purchase||You can get financing to acquire a property with an abbreviated subscription.|
|Property improvement||You can expand or renovate to take advantage of opportunities to expand your offer or modernize facilities.|
|Purchase of equipment||You can buy equipment at auction or second-hand.|
|Purchase of seized property||You can buy highly discounted assets with funding secured by external guarantees.|
|Seasonal inventory purchase||You can buy or replenish inventory without using a cash advance from the merchant.|
These are not the only uses for bridging loans, but these are the most common. paydaychampion.com are typically used in cases where businesses have short-term financing needs or the ability to purchase assets at large discounts. With bridging loans, your business can take advantage of these opportunities without being slowed down by underwriting, keeping you informed until you can secure long-term financing.
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1. Purchase of real estate
Financing commercial real estate can be a complicated and time consuming process. Lenders should look at your business finances, as well as issues specific to the property, such as inspections and appraisals. The process can take even longer than usual if you need to renovate the property (especially if permits are required) or if issues arise with your personal finances. With so much to do, taking out a conventional term loan for a commercial property can easily take the 30-45 days allowed in most purchase contracts.
You don’t want to miss an opportunity to close a key property, especially if you are securing it at an attractive price. You can use a bridging loan to close the property and then pay off the bridging loan balance with the proceeds of a new loan once you’ve locked in the long-term financing. This way, you don’t have to miss the closing deadline, lose your deposit, or miss out on a lot.
2. Improvement of real estate
Bridge loans can also be a great option for expanding or renovating a property. Many manufacturers, manufacturing and even retail companies sometimes need to expand, renovate or otherwise improve the property in order to expand production or develop new offerings. But get a conventional term loan starting work can be difficult, especially if the property is already fully secured.
When you come across opportunities to expand or renovate your facility – to add value to your property or to refine your product lines – you can’t pass them up just because you can’t get a conventional term loan. at this moment. In this case, a bridging loan can help you get the work started without waiting for a lengthy underwriting process, and then you can refinance your property at a higher value after the work is done (or nearly done).
3. Purchase of equipment
Your business may also have the opportunity to buy used equipment (at an auction, for example) at a great price, but these opportunities never last long. Also, since you won’t always know which model you are going to buy or how much it will be worth, it can be difficult to obtain conventional financing beforehand for this type of purchase.
In these cases, you may be able to use a bridging loan secured by other business assets to finance the purchase of new equipment. You can pay off the loan or refinance later with a longer term loan secured by the specific equipment you purchase.
4. Acquire seized property
If you’ve ever been to a Sheriff’s Auction, you know that sometimes you can buy great assets for just pennies on the dollar, but you don’t always know what you’ll find. This lack of detail makes it virtually impossible to arrange conventional financing before bidding at an auction.
Even if you do know what you are planning to buy, many lenders will not lend against assets purchased out of foreclosure. Many lenders require that you pay for these assets with cash or through loans secured by other assets.
In this case, you can get a bridging loan secured by a separate collateral and use those funds to bid or bid on an asset. Then you can make interest-only payments until you can refinance with a conventional loan.
5. Meet seasonal inventory needs
Many retailers use lines of credit to purchase inventory. Unfortunately, some companies do not have access to this type of financing or have already reached their limit. In this event, a merchant cash advance (which is usually very expensive) may be the only other way to buy much-needed inventory – to restock after a sudden surge in sales or to prepare for an influx of business.
Rather than using a cash advance, you can use bridging loans to buy inventory and then refinance with a conventional business loan or pay off the bridge with the proceeds of your sales.
Bridge loans vs conventional bank term loan
Here’s a quick comparison between bridging loans and conventional bank term loans.
- Higher interest rates: Bridge loan rates often start between 8% and 10%.
- Faster subscription: Bridge loans can be guaranteed in 30 to 45 days; conventional loans can take longer, especially if you already have outstanding loans.
- Lower LTV: Loan-to-value ratios for bridging loans are typically around 70%.
- Shorter loan term: Six to 12 months is often the limit for bridging loans, as opposed to five or 10 years for conventional term loans (with amortization schedules of up to 20 or 25 years).
- Interest only: Bridge loans are interest-only loans; conventional loan repayments include both principal and interest.
- Separate warranty: Conventional financing is usually secured by the specific asset purchased or enhanced, but bridging loans can be secured by separate assets.
- Higher qualification requirements: Since bridging loans are faster and pose a higher risk to the lender (if the borrower cannot refinance the loan), they often have strict criteria for the creditworthiness of the business.
When most people take out a bridging loan, they get it as an alternative to a conventional bank term loan. What usually happens is that a business owner considers using a conventional term loan to finance an acquisition or a project, only to run into an underwriting problem, in which case he will find that ‘he will have to find a faster short-term financing alternative. or abandon their plans.
A bridging loan allows the business owner to pursue his projects, on terms that are not totally inferior to those of conventional bank loans. For example, not only are bridging loans faster and easier to obtain than conventional bank loans, but the payments are often just interest, which can lower your cost of ownership until you can refinance.
However, there are drawbacks to bridging loans as well. For one thing, they usually don’t allow you to borrow as much against underlying assets as conventional loans. In fact, LTV ratios are typically capped at around 70%.
Bridge loans also generally carry higher interest rates than conventional financing (although the payments are often lower because they are only on interest). Loans also last only six to 12 months and may require collateral outside of purchased assets.
A bridge loan is a short-term financing option designed to help businesses fill gaps in their financing needs. These loans can help your business get financing quickly so you can take advantage of the opportunities, and then pay off the loan after you secure longer-term fixed rate financing. While bridging loans are often faster and easier to obtain, they can involve higher interest rates and lower LTV ratios. Nonetheless, they can be extremely beneficial, especially in commercial real estate transactions or second-hand asset purchases at significant discounts.