All About Bridge Loans

What is a "bridge loan?" Certainly, it is not a loan for buying a bridge. It gets its name from a frequently used type of financial strategy. Properly used, it can be a decided help in achieving financial goals. Improperly used, it can be a financial disaster.

By definition, a "bridge loan" is a short-term loan used to purchase commercial property. This is something that can come in very handy, depending on the particular situation. There are two main points that you need to consider before you opt for a bridge loan. One is your needs and the other is the state of the property market.

One of the major benefits of bridge loans is that it will allow you to purchase a new property before you have sold your existing one. You will need to evaluate your current situation to determine if your needs justify taking on this type of finance. Some major questions you must field in your evaluation are:

Will you lose the new property if you can't offer a deposit?

Would you be eligible for a discount on the purchase price if you can come up with the cash fast?

What are the existing market conditions in regard to the sale of your existing property?

Would it be possible to sell your existing property in the time frame set out in your finance package?

Most bridge loans typically run for one year and will need to be paid in full at the end of the term unless it is possible to convert it into a commercial loan. Also, interest rates will be higher on a bridging finance package.

If you do not have an urgent need for the new property and the market is slow, it may not be in the best interest of your business to take on this type of loan. On the other hand if the property market conditions are good, you can get out from under a bridging loan quickly. . However, you must realize that a bridge loan has serious risks. It is still something that will need to make sense for your business.

If you feel taking on this type of loan is the right thing to do, you will be far better off going through a specialist commercial lender. This lending institution will shorten the entire process. A lending specialist will know the market and he/she can quickly make a judgment on the best loan for you, based on your particular circumstances. It would do you no good at all if you have worked out a bridge loan package only to find out the loan underwriters have rejected the application.

Be sure to check that the loan can be converted into a conventional commercial finance package. You will also want to check on the type of interest rate and the costs you will entail if you do have to convert.

Most commercial lenders will be willing to extend the terms of your bridging finance package. If you have a buyer and you are waiting for the sale to close, a bridge loan is much more flexible and accommodating than you might expect.

Repaying your bridge loan at the end of the loan term more often than not depends on your ability to sell your existing property. If your property does not sell in the required time frame, you will be paying the existing loan on your current property, your new property and the newly converted bridge loan as well.

If you believe this may be a possibility, be sure to take a package that can be converted to a commercial loan if the need arises. Otherwise, you may have to come up with the full loan sum at the end of the finance term. As I cited earlier, bridge loans can be a decided help for your business, but there are risks. Let the borrower beware !