A commercial bridge loan can be a saving grace in a fast-paced real estate transaction. It is short-term financing, provided quickly, that will help you purchase a property while waiting for long-term financing, back out of a sale of commercial property, or complete renovations on a building with permanent financing. Before you sign on the dotted line, however, it is important to understand the terms, risks, and requirements of a commercial bridge loan. To aid you in making a knowledgeable decision, this article provides a list of 10 questions regarding commercial bridge financing.
1. What is a Commercial Bridge Loan?
Before you fill out the loan application, you must know what a commercial bridge loan is. A commercial bridge loan is a type of short-term financing, often between six and twenty-four months in duration, that is used to “bridge” the gap in financing. Common examples of why commercial bridge loans are used are to purchase a commercial property, refinance an existing loan, or renovate a building for permanent financing.
2. How Fast Can You Expect to Get Funded?
One of the main advantages of bridge loans is the speed of the funding process. However, not every lender has the same velocity during their process. It is also important to understand how long it typically takes from application to funding. Some bridge lenders can close your loan in 5-10 business days, and some may take several weeks. This is important information to obtain if timing is critical to your deal.
3. What Are the Loan Terms and Interest Rates?
Similar to other types of financing, bridge loans will have spaces for loan terms and interest rates that can range significantly. The higher interest rate comes from the short-term nature and risk of funding the bridge loan. In addition to that, each lender will weigh the application differently based on creditworthiness and property value.
4. What Is the Loan-to-Value (LTV) Ratio?
LTV is a valuable ratio when it comes to bridge financing. Most lenders will loan you up to 65–75% LTV, depending on the property’s current appraised value or purchase price. If your deal needs a higher LTV, expect to put in additional equity or identify alternative funding sources to close the deal. Knowing your value upfront will help determine if the deal is financially worth pursuing.
5. Are You Required to Have Collateral?
A bridge loan is almost always secured by collateral, which is usually the commercial real estate involved in the deal. In addition, some lenders will require other value assets in the form of collateral to close the loan. Make sure you understand the type and dollar amount of assigned assets and whether a personal guarantee is needed from you as the borrower.
6. What Is the Plan to Pay Back the Loan?
Lenders will want to know exactly how you plan on paying back the loan, whether it’s through a sale, refinance, or operational revenue. Be ready to explain your plan in detail and ask lenders what acceptable repayment options are. Not having a well-thought-out exit strategy can lead to a rejection of the loan or, worse, financial troubles down the line.
7. Are There Prepayment Penalties or Extension Fees?
Some commercial bridge loans have prepayment penalties. It could be expensive if you decide to pay off the loan early. Some loans allow extending the loan—for a fee—if your project or financing timeline has been delayed. Ask about both scenarios. Flexibility is nice; however, be sure you know the costs of that flexibility ahead of time.
8. Will the Lender Require an Appraisal or Inspection?
Most lenders require an appraisal to verify your property’s value and evaluate risk. However, some lenders also require environmental inspections or condition reports. These requirements often impact cost and timing. The lender should be able to clarify which reports are required, who will pay for them, and how those reports may affect the approval of your loan request.
9. What Happens if You Miss a Payment?
Life happens—and so do delays. It’s important to know the consequences of missed payments (or late payments) ahead of time. Will there be additional interest fees? Will you be risking foreclosure on your property? A good and reputable commercial bridge loan lender will clarify these consequences and ensure you understand how to remain in good standing.
10. Does the Lender Have Experience with Similar Projects?
Not all bridge lenders are created equally. Ask if the lender has worked on financing properties similar to yours, or has familiarity with businesses in your industry. A lender with experience will be a tremendous help as you navigate unique challenges or timelines. Working with an experienced lender can save you time, stress, and costly mistakes.
Conclusion
Bridge financing can provide some very powerful opportunities along the way, but it also comes with risks to be aware of. Asking the right questions will help you enter the process prepared and confident. Beyond understanding the loan terms, repayment options, and the lender you will be working with, your knowledge and understanding will be your best defense.
