Business Bridge Loans: What They Are and How to Get One

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A business bridge loan, also called a swing loan, a gap loan, or a commercial bridge loan, can provide the short-term financing your business needs to fill a gap while you wait for more permanent financing to come through.

They’re a little different from real estate bridge loans, which a homeowner may use to finance the purchase of a new house before their old house has sold. However, the principle is the same – you get the loan to meet an immediate need for funding, secure it with collateral, and repay it once you have a more long-term financing solution set up. A commercial bridge loan allows you to borrow about 80 percent of the value of the collateral you put up.

How Bridge Loans Work

A business bridge loan is meant to fill the money gap between an opportunity that requires cash and the approval of longer-term financing. A bridge loan is usually a short-term financing option, with a higher interest rate than longer-term business loans.

To get a bridge loan, you need to have some collateral to put up. This can be your business premises or equipment, or it can be a property that you’re buying with the money. Lenders will consider the value of that collateral when deciding how much money you can borrow.

Most lenders are going to use your collateral’s loan-to-value (LTV) ratio, or the amount of the loan divided by the value of the capital, in order to determine how much money you qualify for. If you’re borrowing the money to complete a construction project or do renovations to an existing property, the lender may use the loan-to-cost (LTC) ratio, or the amount of the loan divided by the cost of construction, to determine how much you can borrow.

Lenders are typically willing to lend 65 to 80 percent of LTV or LTC. So, if you put up collateral worth $500,000, and you have a strong credit score and a good debt-to-income ratio, the lender may approve you to borrow 80 percent of the LTV, or $400,000. You will have to finance the rest of the purchase on your own, if need be, whether out of your pocket or by pursuing additional financing.

When to Get a Bridge Loan

Bridge loans are typically used to seize time-sensitive opportunities while it’s still possible. For example, let’s say a beautiful property has just come on the market, and it would be perfect for your planned second location. But it’s in a popular spot and you know it won’t stay on the market long. You can get a bridge loan to buy the property quickly, so that you can pounce on the opportunity and don’t have to wait for long-term financing to be approved. Once you have the property, you can focus on getting more affordable long-term financing worked out and paying off the bridge loan.

A bridge loan can also be useful when you’re not yet able to obtain permanent financing for a project. Perhaps you’re building something and can’t take out a real estate loan on the structure, because it doesn’t exist yet. A bridge loan can help you finance the project in its initial stages. You can even use a bridge loan to buy a house, fix it, and flip it, using the proceeds of the flip to pay off the bridging loan. And, of course, if you’re working on a business deal, you might need cash to fulfill your end of the bargain before you can complete the deal and use your proceeds to pay off the bridge loan.

How to Get a Bridge Loan

Online lenders, private lenders, and banks all issue bridge loans. If you’re trying to get a bridge loan from a traditional bank or credit union, it’s best to reach out to a bank or credit union you already do business with to see if they offer bridge loans. Not all banks do offer bridge loans. However, it’s pretty easy to get business bridge loans from direct lenders these days. Many companies offer favorable loan terms, like three-year terms and interest-only payments, and some can approve your application in as little as three days. A direct lender may be the best choice if you want to buy real estate.

If you want to borrow money to cover your need for capital in between sales, or need to purchase inventory, you can obtain a bridge loan from an online lender. Online lenders can provide very flexible loan terms and may be able to approve your application in just 24 hours. Online lenders are a good place to turn if you have bad credit or a short business history.

Sometimes in business, you just need a little cash to tide you over to the next sale or to seize an opportunity that requires fast funding. That’s what commercial bridge loans are for. Know your financing options, so you can answer the door when opportunity knocks.

Frequently Asked Questions (FAQs) About Business Bridge Loans

What is a business bridge loan, and how does it work?

A business bridge loan, also known as a swing loan or gap loan, provides short-term financing to fill financial gaps while waiting for permanent funding. It works by offering you immediate cash flow, secured by collateral, which you repay once you secure long-term financing. This financial bridge allows you to seize opportunities without waiting for lengthy approval processes.

How does a business bridge loan differ from a real estate bridge loan?

While both bridge loans serve as short-term funding solutions, they differ in their purpose. A business bridge loan is designed to cover immediate funding needs for various business purposes, while a real estate bridge loan is typically used by homeowners to finance a new property purchase until their old house sells. The basic principle remains the same: swift financing with collateral until a long-term solution is in place.

When should I consider getting a business bridge loan?

A business bridge loan is an excellent choice when you encounter time-sensitive opportunities that demand quick cash infusion. For instance, when a perfect property for expanding your business emerges, you can rely on a bridge loan to secure it promptly. It also proves useful when you need capital for projects without immediate access to permanent financing.

What collateral can I use to secure a bridge loan?

Collateral options for a bridge loan vary and can include your business premises, equipment, or property you plan to purchase. Lenders assess the value of your collateral to determine how much you can borrow. This flexibility allows you to leverage your assets and access the funds you require.

What is the typical loan-to-value (LTV) ratio for a commercial bridge loan?

The typical loan-to-value (LTV) ratio for a commercial bridge loan ranges between 65% to 80%. This means that lenders may approve you to borrow up to 80% of the value of the collateral you provide. For example, if your collateral is worth $500,000, you could potentially borrow up to $400,000.

How do lenders determine how much money I can borrow with a bridge loan?

Lenders usually calculate the amount you can borrow based on the value of your collateral. They assess the loan-to-value (LTV) ratio, dividing the loan amount by the collateral’s value, to determine your borrowing capacity. If your loan is for a construction project or property renovations, they might use the loan-to-cost (LTC) ratio instead.

Can I use a bridge loan to finance a construction project or property renovations?

Yes, a bridge loan can be a suitable funding option for financing construction projects or property renovations. If your project lacks immediate access to real estate loans due to its initial stages, a bridge loan can provide the necessary financial support until you secure long-term financing.

Are bridge loans available from traditional banks or credit unions?

While some traditional banks and credit unions offer bridge loans, not all institutions provide this service. If you already have a banking relationship, it’s best to inquire with them. Alternatively, many direct lenders, including online lenders, specialize in offering business bridge loans with flexible terms and faster approvals.

How long does it usually take to get approval for a bridge loan?

The approval time for a bridge loan can vary depending on the lender and your specific situation. In some cases, online lenders can approve your application in as little as three days, making them a quicker option compared to traditional banks. However, the process may take longer if additional documentation is needed or for complex cases.

What are the advantages of obtaining a bridge loan from online lenders?

Opting for an online lender for your bridge loan offers several advantages. These lenders often provide more flexible loan terms, including interest-only payments and short-term options. Additionally, the online application process is streamlined, allowing for quicker approvals, which is especially beneficial when dealing with time-sensitive opportunities. Moreover, online lenders may be more open to working with individuals with shorter business histories or less-than-perfect credit scores.

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