Commercial Bridge Loans: What They Are, How They Work, & When You Need One

If you don’t have time to wait on a traditional loan but don’t want to pay the high interest rates and additional fees that come with an alternative loan, there’s a solution.

A commercial bridge loan can be used to fund a large purchase, giving you access to fast capital while also giving you enough time to secure low-cost, long-term funding. If you need a loan to bridge the gap in cash flow while waiting for another loan, keep reading to learn more about commercial bridge loans and how they can work for your business.

What Is A Commercial Bridge Loan?

A commercial bridge loan is a type of short-term loan that businesses use as they seek a more long-term funding option. This loan bridges the gap in cash flow between the time a business applies for funding to the time that funds are disbursed.

A bridge loan is a temporary funding solution. Loan terms are often quite short, and interest rates can be high, so you want to pay this type of loan off as soon as possible by securing low-interest, long-term financing elsewhere.

What Are Commercial Bridge Loans Used For?

Commercial bridge loans are most commonly used to secure commercial real estate quickly. With bridge funding, the business owner can secure short-term funding quickly to lock in a deal, purchase the property, and have time to secure a low-cost, long-term loan.

In addition to purchasing commercial real estate, bridge loans can also be used for:

• Renovating commercial real estate or investment properties
• Purchasing long-term equipment
• Acquiring a business

How Commercial Bridge Loans Work

When applying for a commercial bridge loan, the business owner applies with a lender, provides the information and documentation required to close the loan, and receives funding quickly — sometimes in just a matter of days.

Once approved, the lender will set the rates and terms for your bridge loan, and funds will be disbursed so that you can make your purchase. You would then make payments as agreed until you secure a mortgage or other long-term funding that covers the principal, interest, and any fees required by the lender.

The property being purchased with loan funds is typically the collateral that secures the loan. That means if you default on your agreement to repay the lender, the lender has the right to seize and sell the property to recoup its losses.

Typical Bridge Loan Borrowing Amount

Borrowing limits vary by lender, but one thing you want to keep in mind is that most lenders will consider loan-to-cost (LTC).

The LTC is the maximum percentage of the total cost that the lender will give to a borrower. For most lenders, the LTC is 70% to 80%.

Let’s say you want to purchase a property that is priced at $100,000 and the lender is willing to offer a bridge loan of 80% LTC. This means that the lender will provide you with an $80,000 loan, while you will be required to come up with the remaining $20,000.

Typical Bridge Loan Terms

Bridge loans are temporary, short-term solutions to cash flow problems. Most bridge loans have repayment terms of one year or less. Some lenders may provide bridge loans with longer terms, but these generally will not exceed two years.

Many bridge loans will need to be repaid in just a matter of months, giving you enough time to secure more permanent financing.

Typical Bridge Loan Rates

Bridge loan rates vary by lender. However, rates are higher than your average loan at around 9% to 12%. Since terms for bridge loans are so short, lenders use high rates to make money off their investments.

Most bridge loans also come with various fees, including:

• Origination fees
• Escrow fees
• Appraisal fees
• Title fees

A prepayment fee may also be applied if you pay your loan off early, so make sure to ask your lender about this fee and any other applicable fees that may increase your cost of borrowing.

How To Qualify For A Bridge Loan

The requirements for receiving a bridge loan vary by lender. However, bridge loan requirements often aren’t as strict as those for traditional bank loans. However, remember that the cost of borrowing is much higher than other financial products. You must also be able to secure long-term financing before your loan is due, or you risk losing your collateral.

Most lenders will look for the following when determining whether to approve a loan application:

• Affordability: Lenders will consider various factors, including your debt-to-income ratio (DTI) and your debt coverage service ratio (DCSR), to determine if your cash flow is sufficient to cover current obligations plus any costs associated with your new loan.
• Equity: A bridge loan will only provide around 70% to 80% of the cost of your purchase. You will need to have the remaining 20% to 30% available to complete your purchase.
• Property Being Purchased: Lenders will look at what you plan to purchase with loan proceeds. If you’re purchasing commercial real estate, for example, the lender may consider factors like the location of the property, its condition, and existing liens.
• Credit History: If you have a low credit score, this doesn’t necessarily disqualify you from receiving a bridge loan. However, lenders may look at your past credit history to determine if derogatory marks — bankruptcies, foreclosures, and liens, for example — make you a risky borrower.

When To Use A Commercial Bridge Loan

To determine if your business will benefit from a bridge loan, consider why you need funds. If you need funds for one of these reasons, consider speaking with a lender:

Bridge loans aren’t a good fit for every business. Consider other funding if any of the following applies:

Where To Find Lenders That Offer Bridge Loans

Does a bridge loan seem like a good fit for your business? If so, the next step is to find your lender. Get started with these options.

• Banks: Many traditional banks offer commercial bridge loans. Start by speaking with any institutions that you currently have working relationships with. Even if your bank offers bridge loans, make sure to check out other options in your area to find the best terms and lowest rates.
• Credit Unions: Credit unions that offer commercial products and services may provide bridge loans. Start with your credit union, or search for ones in your area to find the institution that best fits your needs.
• Hard Money Lenders: Hard money lenders are private investors that may offer short-term bridge loans. The good thing about hard money lenders is that they often put the value of the property over factors such as credit history. The downside is that they may have higher rates than other lenders. Make sure to compare your options and only work with reputable hard money lenders.
• Alternative Lenders: Some online lenders specialize in bridge loans and other short-term funding. These loans typically have quick turnaround times, and you never even have to leave your office to get the money you need.

The Bottom Line On Commercial Bridge Loans

Commercial bridge loans are great for purchases that require quick funding until long-term financing can be secured. However, this is only a source of temporary funding that should only be used in certain situations when waiting for another loan isn’t an option.

If a bridge loan isn’t the right fit, there are numerous options to help you score the capital you need. Start by understanding the types of business loans available, then kick off your search with our picks for the best small business loans.