As a rule, commercial bridge loans are used to ‘bridge’ the gap between two transactions and finance an immediate business opportunity – typically in commercial property.
It’s a short-term loan that can be used to purchase a commercial property like an office building or retail store. Alternatively, it can also be used to finance a renovation or construction of commercial property. The repayment schedule might range from six to 24 months for such a loan.
Since traditional, long-term loans often take a long time to be approved and disbursed, a commercial bridge loan can be used by businesses to seize immediate opportunities while they wait for the long-term financing process to be completed.
The Purpose of Commercial Bridge Loans
Technically, a commercial bridge loan can be used to fund a wide variety of short-term business expenses. But these loans are typically used to provide the upfront cash for buying a piece of commercial real estate.
In other words, a business owner might use a commercial bridge loan and quickly seize the opportunity to buy a distressed commercial property at a discounted price. They could then refinance the commercial bridge loan for a conventional commercial mortgage a few months down the line.
While this is a common use of bridge loans, however, you could also use such a loan to acquire a new business or buy an expensive piece of equipment.
The only requirement is that you should provide collateral for the loan and should refinance to a more conventional financing option down the line.
How Do Commercial Bridge Loans Work?
Commercial bridge loans are typically secured loans, meaning that you’ll need to put up collateral (preferably the commercial property you’re buying or renovating) in order to be approved for such a loan.
The loan amount you’re offered will usually be a certain percentage of the value of the collateral – which is known as the loan-to-value (or LTV) ratio. Most commercial bridge loans have an LTV ratio of about 65% to 80%.
Since the commercial bridge loan is linked to the value of the collateral you offer, lenders are often lenient about other traditional loan requirements, such as your credit score and payment history. But the interest rate for a commercial bridge loan will almost always be significantly higher than a traditional business loan.
Commercial Bridge Loans vs. Traditional Loans
Some of the major ways in which a commercial bridge loan differs from a traditional business loan are as follows:
| Commercial Bridge Loan | Traditional Business Loan | |
| Duration | Loan duration is short – typically about a year. | Loan duration is longer – up to a decade or more. |
| Interest Rate | High | Relatively low |
| Loan Type | Secured with a collateral | Might be secured or unsecured |
| Speed | The approval process is fast | Approval process is usually slower |
| Requirements | The approval process is usually slower | You’ll usually need a good to excellent credit score to qualify |
| Purpose | Cover short-term gaps in funding and seize immediate opportunities. | Broader in scope; used to achieve long-term business growth. |
Pros and Cons of Commercial Bridge Loans
While commercial bridge loans can be useful under certain circumstances, it’s best to carefully weigh the pros and cons before applying for this type of financing.
Pros of Commercial Bridge Loans
- Fast: Commercial bridge loans have a faster approval process than traditional business loans. Hence, they can provide you with the quick capital you need to seize urgent or time-sensitive business opportunities.
- Accessible: If you (or your company) have a poor credit score, then a commercial bridge loan might be your best financing option. These loans are granted more on the basis of the value and viability of the property being bought (collateral) than the borrower’s creditworthiness.
- Customization: Lenders often provide customized loan structures for borrowers seeking commercial bridge loans. This might include low monthly payments, an expedited approval process, and competitive interest rates.
Cons of Commercial Bridge Loans
- Risk: If you purchase a piece of commercial real estate with a bridge loan, you’d have to put that property up as collateral. This would put the entire investment at risk in case of a default. A short-term bridge loan could also be risky due to market fluctuations and unexpected delays in construction – which might hinder the successful repayment of the loan.
- Interest Rates: As commercial bridge loans are considered riskier (and don’t place much importance on credit scores), they generally come with significantly higher interest rates compared to traditional business loans. This could place an additional burden on the borrower, making it harder to pay back the loan on time.
- Short Duration: Commercial bridge loans have a short repayment schedule, seldom exceeding two years. This could put pressure on the borrower to quickly secure long-term financing or sell the property before the repayment period comes to an end, which may not yield the best ROI for the business.
Who Can Apply for a Commercial Bridge Loan?
Typically, commercial bridge loans are availed by business owners operating in the real estate sector who have a short-term financing need for property acquisition or renovation. Property developers, real estate investors, and construction companies are some of the common types of businesses that apply for a bridge loan.
Before approving the loan application, the lender will consider several factors, such as the value of the collateral you’re offering, the viability of the project you’re planning to invest in, your exit strategy, and your credit history.
A commercial bridge loan might be most beneficial if you’ve been presented with an opportunity to buy a piece of commercial property at a large discount, either due to poor management, the current owner’s financial distress, or some other reason. This will make the investment worth the higher interest rates that you’ll be paying.
How Do You Qualify for a Commercial Bridge Loan?
To qualify for a commercial bridge loan, you’ll have to keep a few important factors in mind. These are:
- Debt Service Coverage Ratio: This is calculated by dividing the company’s annual net operating income by the debt obligations of the current year. It shows lenders whether or not the company has enough income to pay its debts, including the new loan it’s about to take on.
- Time in Business: Most lenders prefer working with businesses that have been around for a long time and have plenty of experience in the industry since it means a higher probability of success.
- Collateral: As commercial bridge loans are secured loans, you’ll need to put up a collateral asset with a realistic loan-to-value ratio in order to reduce the lender’s risk.
- Proper Documentation: To successfully apply for a commercial bridge loan, you’ll need to have documentation like personal and business tax reports, income statements from the previous property owner, executive summary of the action plan, schedule of leases, broker’s letter of value, and exit strategy.
If you meet all of these requirements, you’ll significantly improve your chances of being approved for the commercial bridge loan you’re seeking.
Where to Get Commercial Bridge Loans
There are various types of traditional and alternative financial institutions that offer commercial bridge loans. Some of them have been listed below:
Banks and Credit Unions
Traditional, established lenders like banks and credit unions usually only offer bridge loans to large businesses with strong revenue, steady cash flow, and a proven track record in the industry. The advantage is that they typically offer lower interest rates and better repayment terms than other lenders.
To qualify for such a loan, your business will need to have a good credit score, sufficient collateral, and all the proper documentation, like tax returns, business plans, financial statements, etc. Lastly, it’ll need to undergo a process of thorough review and assessment by the lending institution.
Direct Lenders
These are private companies that use their own money to provide financing to borrowers in the commercial real estate sector. Since they have experience and expertise in the industry, they provide advice and guidance to the borrowers along with the funding.
You can find direct lenders that work across the country or in a specific state or region, as well as ones that provide commercial bridge loans for healthcare facilities, hospitality real estate, retail stores, and much more. Usually, these lenders have flexible requirements and approve loans within a month or less.
Online Lenders
Not many online lenders offer commercial bridge loans, so you might have to do some research to find one that meets your financing needs. The online lenders that do offer bridge loans usually charge higher interest rates, but they also have flexible financing terms and extremely fast loan approval processes.
With some online lenders, your loan application can be processed within 24 hours or less. An online lender might also be your best option for getting a commercial bridge loan if your business is a startup or you have a poor credit score since they have less stringent requirements than traditional lenders like banks.
How to Get a Commercial Bridge Loan: The Process
Getting a commercial bridge loan essentially involves four important steps. Once you’ve identified the business opportunity that requires bridge financing, you must:
- Prepare the collateral asset you’re going to offer the lender in exchange for the loan. Typically, the collateral will be the commercial property you’re planning to buy with the loan or some other piece of real estate.
- Shop around and talk to different lenders offering bridge loans, including banks, credit unions, direct lenders, and online lenders. Find out the interest rates different lenders are offering, as well as the LTV ratios, repayment terms, and other important variables that might have an effect on your investment.
- Choose the lender that best suits your requirements, then submit the application for a bridge loan, along with all the required documents such as tax reports, financial statements, exit strategy, and business plan.
- Complete the application process and close the loan to secure the funding you need. Most lenders of commercial bridge loans will complete the approval process and disburse the loan amount within 30 days.
Is a Commercial Bridge Loan Right for Your Business?
Before applying for a commercial bridge loan, you should spend some time figuring out whether or not this type of financing is right for your business. Since commercial bridge loans come with higher interest rates and stringent collateral requirements, they can be financially risky if you don’t have a meticulous plan on how to best use the funds for the maximum ROI.
If used well, however, the funds from a commercial bridge loan can help you grow your business and improve your bottom line – faster than would’ve been possible with a traditional business loan.
