Bridge loans are not as common in the retail banking sector as they used to be. They are still pretty popular in commercial and investment banking. Bridge loans serve a very valuable purpose when borrowers need access to funding on a short-term basis. However, they do come with higher interest rates and very short terms.
By definition, a bridge loan is a loan intended to bridge the gap between a current financial need and expected future revenue. Bridge loans are considered separate from hard money loans only because they tend to be more targeted by nature. But as far as function is concerned, hard money and bridge loans are quite similar.
What are bridge loans used for? Lots of different things. Below are just a few of the many reasons borrowers apply for them:
1. Acquiring Investment Properties
Actium Partners is a Salt Lake City, Utah hard money lender that specializes in bridge loans. They say that many of their bridge loan clients are looking for fast cash to acquire investment properties in a highly competitive market. Bridge loans fit the bill because they can be obtained quickly.
In a highly competitive real estate market, investors may not have months to wait while the bank does its thing. If they can obtain a bridge loan in a few days, they will opt to do so in order to snap up a property before someone else takes it. Then they will arrange traditional financing to pay back the bridge loan.
2. Restructuring Business Debt
Another common bridge loan scenario involves a company looking to restructure its debt. The company might have an outstanding debt instrument with a quickly approaching maturity date. Without the creditor’s willingness to restructure that debt, the company will not be able to make its payment. A bridge loan can solve that problem.
A bridge loan allows the company to satisfy the outstanding debt and then, like the previous example, seek out traditional financing to pay off the bridge loan. From there, the company can work with its new funding partner on restructuring debts as needed.
3. Taking Advantage of Equity
Bridge loans are sometimes utilized by companies to take advantage of equity locked up in business assets. The plan is to use a bridge loan to meet current financial needs with anticipation that the asset in question will be sold at a later date. Equity from that asset is liquidated via the sale and used to repay the loan.
4. Acquire Residential Property
On those rare occasions when bridge loans are offered by retail banks, the purpose is almost always to acquire residential property. A typical scenario involves a family looking to purchase a new home while simultaneously trying to sell their existing home. Anyone who has done this knows just how difficult it is to coordinate the two transactions.
You might have a situation in which a borrower is scheduled to close on a new home three months before the other buyer is ready to close on the existing home. A bridge loan allows the borrower to close on schedule. As an added bonus, because bridge loans are typically paid off with a lump sum payment, the borrower is not saddled with two mortgage payments during the interim. When he does close on the existing home, sale proceeds will be combined with the standard mortgage to pay off the bridge loan.
Bridge loans serve a valuable purpose by providing funding where traditional bank loans are not possible. When used appropriately, bridge loans can solve a lot of temporary financial problems.