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Business Bridge Loans: How/When To Use Them

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Securing a personal loan is hard enough, but securing a business loan can be even harder if you don’t know where to look. Thankfully, there are solutions like bridge loans that can provide your company with the financing you need to meet both your real estate and business goals.

But don’t just take our word for it — here are some successful use cases to clearly show you how your business can benefit from bridge loans. 

What Is a Bridge Loan?

A bridge loan is a short-term financing solution for individuals and businesses alike. Bridge loans are designed to “bridge the gap” between closing on a property and securing permanent financing. Thanks to this design, bridge loans are known for being efficient and flexible — qualities that your business can definitely benefit from.

 

How Does a Bridge Loan Work?

A bridge loan is a unique type of loan that doesn’t work like your typical conventional loan. For starters, bridge loans have short terms that are usually less than three years in length. This is in contrast to conventional loans with terms that can range from 15 to 30 years. So how does this shorter term work? 

Once a loan closes, payments start within 30 days of closing (unless the owner has an interest reserve set up at closing). From there, you may have to make payments only to cover the accruing interest. However, at the end of the loan term, a “balloon payment” becomes due that covers the rest of the remaining balance of the loan. 

While this “balloon payment” may sound intimidating — it doesn’t have to be. Three years is plenty of time for you to secure permanent financing if you need to. It’s also plenty of time for you to sell existing real estate assets and use the equity in those properties to cover the balloon payment.

Keep in mind that most bridge lenders will confirm your exit strategy during the application process to ensure that you have the ability to make the balloon payment at maturity.  With the right strategy and approach, using a bridge loan for your business could be a smart financial move. 

Common types of exit strategies include:

  • Refinance the property
  • Sell the property
  • Using income from other ventures to pay off the loan

Can Businesses Use Bridge Loans?

Navigating the world of business loans can be confusing and overwhelming if you’re new to this realm. Many business owners have no idea what types of loans they qualify for and what types of loans would be beneficial for them.

The good news is that businesses can definitely use bridge loans to finance real estate purposes. Bridge loans offer a unique financing solution for businesses that are looking for quick and easy cash without a ton of tedious qualification requirements. 

 

Why Should Businesses Use Bridge Loans?

There are several reasons why businesses should use bridge loans, including:

Interest Rates

More favorable interest rates compared to other types of loans like hard money loans. Businesses often think that hard money loans are their only option when it comes to securing quick and easy cash.

However, bridge loans offer a more beneficial alternative. Bridge loans come with interest rates that range from 6 to 10% compared to interest rates for hard money loans that can be as high as 15%. 

Expedited Timelines

More efficient timelines compared to other types of loans like conventional loans. While conventional loans are the most common type of loan when it comes to real estate, using these loans can really slow down your timeline.

Conventional loans often take weeks, if not months, to process and close. For sellers looking for a quick transaction, making an offer with this type of loan can put you at a disadvantage. Instead, bridge loans can be processed and closed in a matter of days rather than weeks — allowing you to make a competitive offer that has a higher chance of being accepted. 

Make More Competitive Offers

Higher down payments can also make your offer more competitive. These days, sellers are getting multiple offers on properties — including some that are all cash. In order to compete with these offers, you should be prepared to put more money down.

You can do this using a bridge loan to make your offer more attractive and beat out all-cash offers. Often, people will contract purchase agreements as “cash-offers” and then they seek bridge financing during their due diligence period. 

More Lenient Requirements 

More flexible requirements compared to other types of loans. This is especially beneficial if you’re a new or small business. Many lenders are unwilling to work with businesses without established or great credit.

Many lenders are also unwilling to work with foreign investors without domestic tax documents. However, bridge lenders are usually more willing to work with businesses and individuals thanks to more flexible qualification requirements. 

Successful Use Cases of Business Bridge Loans

There are so many ways that you can successfully use a business bridge loan to invest in real estate. Here are just a few examples: 

1. Commercial Real Estate Financing

You can use bridge loans to invest in commercial real estate. Commercial real estate is a unique investment area with incredible potential with higher rates of return compared to residential real estate. There’s a wide range of investment opportunities in this realm so that you can really find your niche. 

For instance, you can invest in office space, retail space, industrial, or multifamily. Right now, industrial and multifamily are booming. If you want to deal with businesses as renters rather than individuals, then you should consider industrial.

Some additional benefits include a shorter eviction process, greater creditworthiness from corporate tenants, and more.  These leases are also longer than individual leases so that you have more guaranteed income. 

 

2. Fix and Flip Financing

You can also use bridge loans to finance fix and flip projects. Fixing and flipping is a common real estate strategy that is frequently featured on HGTV. And while many of these investors mention using hard money loans to finance these projects, bridge loans offer a better alternative with lower interest rates. 

Flipping is a great way to earn you top dollar in a hot real estate market. Buyers often aren’t willing to do the work themselves and are willing to pay a premium for houses that are already renovated. Just make sure that you’re knowledgeable about your local real estate market and buyers in order to successfully fix and flip houses using bridge loans.  

3. BRRRR Financing

Finally, you can use bridge loans to help you execute the “BRRRR” strategy of buying, rehabbing, renting, and refinancing. Using a bridge loan can help you make a strong offer with no contingencies on run-down properties that other investors are likely competing for. Furthermore, bridge loans allow for quick closing time frames that are often a necessity in this arena. 

You can use a bridge loan to get you in the door, so to speak, and to get you started on your renovations. From there, you can secure more permanent financing and continue to rent out the property for a profit. Over time, you should be able to pay off your loan with your rental income while continuing to profit. 

How To Secure a Bridge Loan as a Business

Bridge loans are a unique loan product that aren’t offered by all lenders. So how can you secure one as a business?

Here’s what you need to know:

1. Find a lender. It can be difficult to find a bridge loan if you don’t know where to look. This is because traditional lenders like big banks usually don’t offer bridge loans. Instead, you may need to use a private lender.

Searching for private lenders online is a great place to start as it provides you access to all sorts of information. You can check reviews, policies, and more. Just make sure that your lender is responsive, efficient, and transparent throughout the entire process. 

2. Apply for the bridge loan. Once you’ve found the right lender and know you’re qualified, it’s time to apply for the loan. To make the process easier, you should begin gathering all necessary documentation as soon as possible.

While exact requirements vary, you should expect to provide things like income tax returns, bank statements, and W-2s. The lender will also check your credit history — so prepare for a hard hit on your credit report that may affect your overall score. 

3. Get approved and close. The lender will consider all aspects of your application and make a decision. The good thing about business bridge loans is that lenders consider more than just your credit score. So if you have a lower credit score, having a lot of cash in the bank can help make up for this.

Another good thing about business bridge loans is that the closing process is faster compared to other types of loans. So instead of waiting several weeks to close, you can quickly get your financing and close in a timely manner. 

Wrap Up on Business Bridge Loans

You can successfully use bridge loans for your business with the help of the right lender like Vaster. Vaster is a premier bridge lender that has worked with countless clients to provide them with the financing they need to achieve their goals.

Reach out to our lending experts today to learn more.

Commercial bridge loans with no max loan amount Speak with a Loan Specialist  

Sources:

What Is a Bridge Loan & How Does It Work for a Company? | Small Business Chron

How to Invest in Commercial Real Estate | Real Estate Investments | US News

How to Start a House-Flipping Business | NerdWallet

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