One of the more curious funding options in the banking game is something known as the bridge loan. Its name engenders a lot of questions from consumers and business owners alike. Interview the average person on the street and it is quite likely that he or she will have never heard of a bridge loan, let alone know what it is or how it might be used.
Bridge loans are somewhat unique in that they can take many forms. These days, most bridge loans are made for commercial or business purposes. It didn’t used to be that way. Prior to the 2007-2008 housing crash and subsequent recession, bridge loans were pretty common in residential real estate.
Bridge Loan Basics
A bridge loan is a short-term loan designed to ‘bridge the gap’ between an immediate financing need and future financial resources. So back when bridge loans were common in residential real estate, a consumer trying to sell an existing home while looking for a new one could utilize a bridge loan to buy that new house.
The loan would bridge the gap between paying for the new house and selling the old one. When the old house eventually did sell, proceeds from the sale would go toward repaying the bridge loan. The same concept applies to commercial and business bridge loans.
Buying a Commercial Property
Actium Partners, based in Salt Lake City, UT, says that bridge loans are pretty common among real estate investors looking to get their hands on commercial properties. They explain that commercial real estate transactions occur much more quickly than their residential counterparts. Therefore, investors need to be ready to move just as quickly.
A client Actium Partners worked with a few years ago was able to arrange traditional financing on a new property acquisition. However, the bank could not get the deal done quickly enough to facilitate closing on schedule. The client went to Actium for a bridge loan. That loan allowed the buyer to acquire the property while his bank did what they had to do. Bank financing eventually funded repayment of the Actium bridge loan.
All Sorts of Uses
Commercial real estate transactions offer very good illustrations of what bridge loans are and how they are used. It doesn’t hurt that bridge loans for real estate are pretty straightforward in their structure. But truth be told, there are all sorts of uses for which bridge loans are appropriate. Here are just a few examples:
- Debt Restructuring – Companies looking to restructure their debts cannot always rely on their traditional lending partners to do so quickly. Bridge loans can facilitate fast restructuring while traditional lenders work out new solutions.
- Business Expansion – Bridge loans are often the best option for meeting business expansion needs in the short term. That’s because they can be obtained quickly. Business expansion sometimes needs that speed.
- Acquisitions – Businesses of all sizes often turn to bridge loans to fund acquisitions in the short term. When all goes well, the acquisitions end up paying for themselves and the cost of the bridge loans that fund them.
In a nutshell, a bridge loan is a short-term loan intended to meet an immediate financial need. It is approved on the understanding that the borrower expects future financial resources that will ultimately cover the loan and its costs. Bridge loans are risky, but lenders are willing to take the risk in order to reap the reward.
It goes without saying that bridge loans are unique to each lending scenario. They can be the best option for meeting short term needs.