Bridge loans are a type of short term loan. They are also referred to as swing loans. In general, bridge loans are taken out for a maximum of 3 years awaiting long-term or larger financing. The loan's purpose is only to cover the interim period until the more permanent financing can be arranged. Once the new financing is obtained, the money will be used to pay back the bridge loan.
Bridge loans have a higher interest rate than conventional loans. It is not uncommon for lenders to require cross-collateralization in addition to designating a low loan-to-value ratio in order to lower their risk. However, bridge loans are able to be arranged quickly and do not require a massive stack of paperwork.
Bridge loans are frequently used in real estate purchases to quickly close on property, take advantage of a short-term opportunity, or retrieve an estate from foreclosure. When the property is sold or refinanced, the loan is typically paid back.
Bridge loans are similar to hard money loans as both are not traditional and obtained for unusual circumstances or emergencies. The major difference is that hard money refers to the source whether an individual, private company, or investment company. Bridge loan references the duration of the loan.
The interest rate of a bridge loan is generally 12-15% for a maximum of 3 years. For commercial properties, the Loan-to-Value ratio does not exceed 65% and 80% for residential properties. Loans can be issued on a closed or open timeframe for payoff.
Banks do not typically offer real estate bridge loans because of the high risk and lack of documentation which does not meet the industry's lending criteria. A bank would have difficulties justifying its lending practice to government regulators and investors if it issued bridge loans. Therefore, most bridge loans are generated from individuals, businesses, and investment pools.
Bridge loans are used in corporate finance and venture capital as well. They can infuse small amounts of cash to carry a company through consecutive major private equity financings. In addition, they can assist a distressed company while search of an acquirer or larger investor. If a company is being sold, a bridge loan can finance final debt before it is publicly offered.
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Joseph Devine
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