A commercial bridge loan may be a great startup solution for an entrepreneur. Real estate requires adequate funds, and sometimes on short notice. Most new companies do not have the qualifications big time lenders require to dish out that kind of money. This type of loan bridges the gap between what’s keeping you from a suitable facility to operate your dream business.
What Is a Commercial Bridge Loan?
Also called a commercial mortgage bridge loan, serves as short term commercial real estate financing. The commercial bridge loans fill a financial need to make improvements to real estate property. The improvements could be to sell the property for a profit or to use the building for business operations.
Lenders base the amount on the final condition of the real estate, not the condition that needs improvement. The loan terms end once one of two things happens:
- The borrower can get approved for long-term financing
- The borrower sells the property
How Commercial Bridge Loans Work
The loan negotiation starts with the borrower determining what it will take to make upgrades to the property. What’s most important in this scenario is getting a property with a low price and potential for higher value in the future. If approved, interest rates and fees for the loan will vary based on the amount of risk involved.
Lenders also include the market in their determination of loan approval. That means factors like whether it’s a buyers or sellers market matter. The state of the job market also counts. Lenders take several factors into account to figure the amount of the loan. The entrepreneur‘s assets, the property value, and the
The loan amount is based on loan to cost (LTC) and loan to value (LTV) numbers. For the LTC, borrowers will receive up to 80 percent of the total of the acquisition and renovation costs.The LTV is a combination of the property’s market value and how much money it will make once totally restored. That loan amount will go up to 80 percent of the LTV also.
Uses for Commercial Bridge Loans
Typically lenders use this source of funds to bring a property up to standard and make money from it. There are several ways entrepreneurs can enhance their business with commercial mortgage bridge loans.
Perhaps you are in a situation where you don’t meet the credit requirements. It may be because of insufficient credit. You could have poor credit after maxing out the Chase 5/24 rule. Or you could be trying to rebuild. The loan is flexible enough for you to get approved and last a short amount of time while you repair your credit. After that, you can apply for permanent financing.
Complete a Quick Transaction to Secure Ownership of the Property
Some real estate opportunities are too good to miss. Most sellers also deal with buyers on a First come first serve basis. With a quick sale, the process for permanent financing will be too long. With a commercial mortgage bridge loan, lenders can approve the loan within 2 to 5 weeks.
Supply the Need for a Portion of the Funds (Joint Project, Down Payment, or Lender Contribution)
A lender may supply funding up to a certain amount and require the borrower to pitch in the rest. For a partnership or team project dealing with real estate, each person will contribute their share of the financing.
Fill Tenant Vacancies
A property that was not managed well or has poor living conditions may not meet occupancy expectations. A loan to repair and upgrade the property will make it more attractive to increase the ratio of occupants.
Purchase a Building
Entrepreneurs can use the loans to make purchase like duplexes, apartments, office space or retail suites. They can build from the ground up by either buying vacant land or demolishing an old building.
Let’s say you start a banquet hall business and you choose to build your facility. A commercial bridge loan can help speed up the process of getting your building ready. That will get you a faster return on investment (ROI), which will help secure a permanent lender.
How Does a Commercial Bridge Loan Differ from a Stated Income Business Loan?
With stated income business loans, the approval process is short and simple. Entrepreneurs qualify based on the income they claim to make on an annual or monthly basis. This works well for those who work by contract or get payments in cash. While stated income lenders don’t require documentation showing your income, they may view your credit file to make sure your statement seems truthful.
Commercial bridge loans are specifically for real estate or operating building ventures. They also differ from stated income loans because they look at other criteria to make their decision on the loan. Lenders want to determine if it makes sense to put money toward trying to improve this property. Mainly, they look at income earned from the property and if you would most likely qualify for long-term financing when the commercial bridge loan terms are up.
Are These Loans Right for You?
To decide if a commercial bridge loan is right for you, think about your business goals. Does your goals as an entrepreneur align with the purpose of the loan? Remember the main objective of a commercial bridge loan is to give short term financing to improve the property’s state and usage. You also need to think about if you meet the qualification to apply for the loan.
Evaluate your situation and weigh out the pros and cons to determine if the loans are a good fit.
Benefits of Commercial Bridge loans
- Short term- terms normally between 6 months and 3 years)
- No cap on the amount of the loan
- Quick approval
- Versatile property and usage option
Drawbacks of Commercial Bridge loans
- Minimum loan of $1 million dollars
- Tricky rate and fee schedule
How to Qualify for a Commercial Bridge loan
Most of the criteria is related to the real estate industry as opposed to your credit history. They do look for a fair credit score of around 650 to make sure borrowers can qualify for a long term loan when it’s time. Business owners may also need to have cash on hand to pay interest to the lender while the property is under construction. The most important qualifications are experience, net worth, and debt service coverage ratio (DSCR).
Talk to a Business Financing Expert
If you’re looking for a temporary solution to acquire property, a commercial bridge mortgage loan may be a good fit. If you’re trying to decide if the funding works for your business, get help from a credit expert. These observe your situation and review the qualifications to determine if you should apply. They are skill at helping you find the right financing and lender.