Commercial bridge loans represent a specific kind of financing with limited practical use. Individuals and organizations that do make use of them benefit greatly from the advantages they offer. But since most of us will never face a financial need requiring bridge funding, bridge loans will forever remain a mystery to us.
Private lenders are the most likely sources of commercial bridge loans. Banks do make them from time to time, but they tend to look at other forms of financing first. With all that said, here are six key aspects of bridge loans in the 2020s:
1. They Are in the Minority
When you take a broad look at all the distinct types of financing that fuels the world, you discover that bridge loans are in the minority. That is not because of something inherently wrong with bridge financing. It’s simply due to the fact that bridge loans are designed for very specific needs. Those needs, compared to most other lending needs, are also in the minority.
2. Real Estate Is the Biggest Need
The majority of commercial bridge loans made in the United States go toward real estate transactions. That is certainly the case for Actium Partners out of Salt Lake City, UT. Investors utilize Actium bridge loans to help them quickly acquire lucrative properties while they work on arranging traditional financing.
Having access to a bridge loan could mean the difference between securing a deal and letting it go to a competitor. That leads us to the next key aspect of bridge financing: speed.
3. They Can Be Obtained Quickly
One of the things that makes bridge financing so attractive is the fact that loans can be obtained and funded rather quickly. A commercial bridge loan is backed by a particular asset rather than the full faith and credit of the borrower. As such, lenders do not have to follow long and complicated processes to approve and fund.
A bridge loan can be approved in as little as a day. Provided circumstances are right, it can be funded in anywhere from 24 to 48 hours. That kind of speed is attractive to a real estate investor trying to close a deal before the competition comes along.
4. The Terms Are Extremely Short
By their nature, bridge loans are intended to bridge the gap between a current financing need and a future source of traditional funding or income. As such, bridge loan terms are extremely short. Anywhere from six months to a year is pretty typical. Going beyond one year would be unusual for a bridge loan.
5. The Interest Rates Are Higher
Along with extremely short terms, commercial bridge loans have higher interest rates. How high depends on the lender. It is not unusual for a bridge loan to be several percentage points higher than a commercial bank loan.
The reason for this is encapsulated in a single word: risk. Even though bridge loans are short-term instruments, they do present an elevated level of risk to private lenders. Higher interest rates are one way to mitigate that risk, at least to some degree.
6. They Are for Commercial Needs Only
As the name implies, commercial bridge loans are only for commercial needs. Consumers used to be able to get bridge loans pretty freely prior to the 2008 financial collapse, but no more.
The key aspects of bridge loans are what separate them from more traditional financing. Bridge loans are an effective tool in helping individuals and companies meet their financial goals while pursuing growth and expansion. For those who use them frequently, they work quite well.