The need for short term funding comes up from time to time for business owners. In order to secure a much larger loan, businesses will sometimes utilize a bridge loan to hold them over. For many different reasons, this happens from time to time, but it is very common in real estate transactions.
Because they are so large, commercial loans are more involved than regular business loans. And, not surprisingly, they are able to take a very long time to wrap up. Between the time it requires to close a deal on a building, and how long it takes you to actually get a bank to agree to lend you cash, it could take months sometimes. After which you?ll need the bank to actually lend you the cash whenever you close on the property. Due to the short term needs required by businesses in a real estate transaction, and entire type of business funding was born in the form of bridge loans.
In order to help businesses get through the months preceding the execution of a commercial mortgage, bridge loans fill that gap by offering quick, short term access to capital. Bridge loans are short term. Sometimes, they can be amortized over just a few months. The cost also tends to be greater than normal.
For most people, this higher rate is acceptable, more or less, because of the size of the bridge loan. This is because bridge loans tend to be much smaller in comparison to the larger, second loan lined up. On a smaller dollar amount, a high interest rate still won?t come out to a high cost, dollars wise. It?s almost negligible when you compare it to the size of the additional round of funding you have lined up. So when you add both loans and both interest rates, the interest rate on the bigger loan will have a much higher impact on the effective rate of both rounds of funding.
Something else to keep in mind is that most bridge loans have one major contingency. They require that you already have that second round of financing locked up. Without a commitment from another bank for the larger round of financing, you?ll probably be out of luck in trying to get a bridge loan. Since the mortgage you?re likely acquiring is so large, and the bridge loan comparatively small, most bridge loan providers, in order to minimize the risk involved, will require that you pay off the bridge loan as soon as you receive the mortgage.
Small Business Loan Options can help to connect you with industry-leading lenders who provide bridge loans, among other things. Your business profile and your personal preferences drive their algorithm to help match you with great lenders within their network.
Source: http://immfinancial.com/2012/bridge-loans-to-supplement-more-funding/
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