For Commercial Real Estate investors, there are times when business opportunities arise and there is a lack of immediate funding – either finances are tied up in other investments, or long-term financing is on it's way, but the money has yet to be disbursed. In order to cover these gaps so opportunities aren't missed, many CRE investors turn to bridge loans.
How Do Bridge Loans Work?
As the name implies, bridge loans are designed to span gaps in CRE funding. They are a form of short-term financing that can be arranged very quickly to cover immediate costs in lieu of long-term working capital. For instance, a CRE investor might have a newly acquired property, and want to renovate the existing structure so it can be listed on the market. Instead of reaching into personal reserves or waiting for a conventional loan to be processed, a bridge loan can be arranged very quickly so that funding is available for the renovation and the property can be sold quickly.
Bridge Loans Are Very Different From Bank Loans
Traditional bank loans are harder to secure these days, especially for CRE investors who might not have flawless credit or a long financial history from steady sources. Additionally, banks loans can take weeks to process, which makes seizing time-sensitive real estate opportunities nigh impossible. Bridge loans can be arranged quickly, and they are not bound by the lending restrictions of traditional sources. This means that bridge loans can be customized to our specific needs, rather than the “one size fits none” approach that large banks use when processing loan applications. It should be noted that because a bridge loan has to be arranged quickly and for specific terms, the interest rate is usually slightly higher than a conventional loan – but that is because most of the risk is carried by the lender, rather than the CRE investor.
No Penalty For Early Payment
Traditional bank loans try to keep borrowers on a regular payment schedule, in order to make as much money as possible off of the interest by spreading out payments over monthly installments. Should a CRE investor attempt to pay off the loan early in order to eliminate existing debt, prohibitive fees and penalties will be triggered so the bank can make up the difference of what the interest would have generated in one lump sum. Bridge loans, by contrast, have no early payment fees, so CRE investors can focus on acquiring, renovating, and selling properties, rather than budgeting out for loan payments well after the deal is completed.