If you're looking for business financing—particularly to purchase or fund a real estate project—you may have come across commercial bridge loans. Bridge loans, however, are a very unique type of short-term financing that function differently from typical business loans.
So, what exactly is a commercial bridge loan if I don’t have real estate or assets to pledge and how does it work?
As we mentioned, commercial bridge loans are a very specific type of financing and differ from other types of loans. Bridge loans—also referred to as bridge financing, swing financing, or gap financing—are used particularly to finance an immediate opportunity, typically in business upfront cost for a project, inventory or even bad debt refinancing.
As the name implies, commercial bridge loans are used to "bridge the gap" between a business's current need for financing and a more long-term financing solution like an SBA loan or a bank loan. When it comes to business bridge loans, you're most often talking about commercial unsecure term loans. In other words, these are loans that are used to finance your capital needs while you're in the process of arranging a long-term form of funding or you simply want a longer amortization without a prepayment penalty.
In fact, bridge loans are frequently used by companies to capitalize for a short term like 6 months even though the loan is amortized over 5 to 8 years. Of course, commercial bridge loans, however, refer specifically to bridge loans used by a business—for commercial purposes. With all of this in mind, here are a few key points to help your understanding of commercial bridge loan financing:
Commercial unsecured bridge loans are short-term or interim financing—terms, therefore, are usually on the shorter side—between 3-5 years where a mortgage is typically 20-30 years.
Collateral is usually not necessary • Although lenders will consider traditional business loan requirements, the typical unsecured bridge loan gives you credit for good business and personal credit instead of your assets. • Bridge loans are usually fast-to-fund—but can come at rates higher than a mortgage, eidl or SBA loan but still very affordable.
Commercial bridge loans can be issued by banks, alternative, online lenders, as well as private lenders, venture capital companies and subcorps of your favorite national bank. How do commercial bridge loans work? This commercial unsecured bridge loan would provide you with the funding to take advantage of the opportunity immediately—and then you would be able to find a more affordable, long-term form of financing or refinance your existing business loan if you feel there is an opportunity for a lower rate and/or longer term.
All of this being said, let's look at a few common use-cases for commercial bridge loans to get an even clearer sense of how they work. For example, say, for instance, a client comes to you with a great project assuming you can provide and support your own payroll, costs and build out till he pays your invoice in 30-90 days. With a commercial bridge loan, you can secure the funds necessary to bid the job and lock in the opportunity without hurting your operating cash flow.
Then, once you secure your job you can then pay it off with proceeds if it’s a fast turn around or refinance the bridge loan with a more affordable commercial loan when a better option arrives. Tiding your business over before acquisition You may take on interim financing, in this case, commercial bridge loan financing, to access capital until the acquisition is complete. This scenario typically qualifies as bridge financing because your business has an impending source of capital lined up—the purchaser—to get out of the short-term financing in the near future. Even if, in this situation, the loan is never formally refinanced, the use of proceeds to tide your business over until you receive the pay-off from the acquisition, still qualify it as a form of commercial bridge financing.
Finally, one last example of a use-case for commercial bridge loans is for stocking up on inventory. Let's say you come across a huge liquidation sale of inventory that you typically stock—you'll likely want to take advantage of this opportunity to stock inventory at a discounted rate. In this case, you'll need access to a significant amount of capital, and quickly. Therefore, you might take on short-term financing in the form of a commercial bridge loan to make this purchase. After you secure the inventory, you can then refinance your bridge loan with a longer-term, more affordable business loan.
What to look for in a commercial bridge loan So, if you think a commercial bridge loan might be able to meet your business financing needs, there are a few things you'll want to keep in mind as you start your search. Of course, you'll want to look out for the qualities of a loan that you would for any type of loan—interest rates, terms, loan amount, application fees, lender limitations, etc. However, with this type of interim financing, you'll likely want to pay attention to two fundamental characteristics in particular:
• Funding time: Any commercial bridge loan you're considering needs to fund quickly enough to allow you to put the proceeds toward whatever urgent expense you have. As a result, depending on your timeframe, you may need to look outside traditional lenders. Typically, banks are slow to fund business loan applications, and therefore, it may be worth looking into your commercial bridge loan options from alternative lenders—who can sometimes fund your application in as little as one day.
• Prepayment incentives: Ideally, your commercial bridge loan should offer some sort of prepayment incentive—after all, by definition this type of loan is temporary and you should want to pay it off early. For example, if you take a bridge loan that is amortizing, paying it off early will mean that you’ll save money by avoiding interest. On the other hand, if you take on a commercial bridge loan with a factor rate—which typically means you’ll pay a set amount of interest no matter what—you should make sure it comes with a prepayment discount. In this way, if you have to pay a significant prepayment penalty for paying off your loan early, you might want to keep exploring other options.
