Commercial Bridge Loans – Everything You Need to Know

David Cohn
October 28, 2020
Bridge Loans

If you’re searching for financing to purchase a commercial real estate project, you have probably encountered some information on commercial bridge loans.

Do you want to know precisely what they are? How does a bridge loan work? What are the typical bridge loan rates, and where can you find bridge loan lenders?

This blog will answer all these questions and more, to help you understand the world of commercial bridge loan financing and whether it’s the right funding product for your project and your situation. Let’s get started with the basics.

What is a Commercial Bridge Loan?

A commercial real estate bridge loan is a particular financing type designed to fund immediate opportunities while waiting for another source of funding.

Perhaps the simplest bridge loan definition is in the term itself; this loan “bridges” that gap between two consecutive funding events: the time money is needed and that time when money is expected to come in to pay the obligation in full.

These loans are mostly used by borrowers who want to buy a piece of commercial real estate or do renovations immediately while they apply for and wait for longer-term funding. They are also used by borrowers who want to purchase a new property right away while waiting for another property to sell.

CRE investors turn to commercial bridge loan lenders when they need money to take advantage of an opportunity quickly before others can beat them to it.

As you probably already know, many CRE deals are time-sensitive, and there’s not always enough time to wait for traditional loans that take many weeks and even months to process.

A bridge loan—sometimes called interim financing, swing loan, or gap financing—is an excellent short-term loan that can fund the opportunity in the meantime.

Bridge loan lenders can usually customize terms and interest rates to suit different borrower requirements and situations. Technology has also made this type of funding more widely available because you can get bridge lending online these days.

Key things to remember

Here are the most essential points to remember to help you understand the essence of bridge loan financing for commercial properties:

  • Commercial bridge loans are interim, short-term financing. Terms are typically on the shorter side, from a few months to a year.
  • Most of these loans require collateral, which is the property you want to purchase or renovate in the case of commercial real estate.
  • Qualifying for a bridge loan is a bit easier than qualifying for traditional loans. Some lenders will still consider your credit history, but it’s the value of your CRE collateral that will play the most massive role in whether or not your application gets approved.
  • Funds can be released in a matter of days. However, because bridge loans are risky for lenders, you should expect high-interest rates.
  • Aside from banks and hard money lenders, some alternative private lenders offer bridge lending online.

Now that you have a solid understanding of bridge loan definition let’s talk more about how these financing strategies work. These loans function slightly differently; they all depend on the lender you choose to work with and your specific needs.

But on the whole, a commercial real estate bridge loan will provide you with the money to quickly take advantage of investing opportunities until you can secure longer-term and more affordable financing or until you can refinance the loan.

Lenders that offer commercial bridge loans require borrowers to put up their commercial real estate property as collateral and offer relatively short loan terms. Additionally, lenders in this niche usually calculate the loan amount they can offer based on the property’s value that you want to purchase or renovate.

They will evaluate the asset based on its LTV (loan-to-value ratio) or its ARV (after-repair value ratio), ultimately offering a loan amount equal to about 70% to 80% of the value of that commercial real estate asset. This means that as the borrower, you have to finance the remaining percentage from your pocket.

What are the commercial bridge loan interest rates?

This again depends on the lender and the overall situation. If you get a CRE bridge loan from a traditional bank, you can expect higher rates than the usual rates imposed on bank loans, ranging from 6% to 11%. Should you choose to work with a private alternative lender, rates will be even higher—usually starting from 7% to as much as 30%.

Aside from this, bridge loans also involve more fees than other types of loans. Expect to pay for an origination fee and an appraisal fee, among other things.

When does it make sense to use bridge loans?

Even though bridge loans are high-interest, high-risk loans, they are widely used in the commercial real estate industry.

Seasoned investors routinely use them, and large-scale institutional investors always seek acquisition bridge financing to fund their behemoth projects. Let’s explore some of the common use-cases for CRE bridge loans so you can get an even better sense of how these instruments work.

For commercial real estate

Let’s say that a prime storefront in a high-traffic shopping area in your neighborhood is about to be put on the market. Using a commercial bridge loan lets you quickly secure the money you will need to purchase the property immediately before anyone else gets their hands on it.

Then, after securing your property with bridge financing, you can refinance it and find a more affordable loan—loans that are cheaper but take a lot of time to qualify and get approval for.

For other business purposes –

Though bridge loans are most widely used in commercial real estate, they can also be used in other industries, particularly for tiding a business over before acquisition.

Let’s say that your company is in the process of pursuing an acquisition deal. You can choose to take on interim financing to access capital while waiting for the acquisition to be completed.

This scenario qualifies as bridge financing because your company has an imminent capital source lined up—in this case, the purchaser—that will allow it to get out of short-term funding in a few months.

Meanwhile, you can use proceeds to keep your business above water until the acquisition funds come in.

Bridge loans can also be used to stock up on inventory. For example, you might come across a significant liquidation sale of items that you need to stock, and you want to take advantage of the opportunity to amass inventory at deeply discounted rates.

But to do this, you’ll need a significant amount of money—and quickly. A short-term bridge loan might be the best choice in this scenario. After you buy the inventory, you may choose to refinance the bridge loan with a more affordable and longer-term business loan.

What Should You Look for in a Bridge Loan?

Now that you have learned more about commercial bridge loans and have decided that they will meet your financing needs, it’s time to search for the right loan product. There are several things to keep in mind as you search for a suitable solution.

Of course, you have to look at the loan’s fundamental qualities: particularly the loan amount, terms, interest rates, fees, and lender reputation, among others. But you have to look beyond these, too.

With this kind of interim financing, it’s important to pay attention to two characteristics in particular:

Funding time

The whole point of a commercial bridge loan is to give you the money you need quickly—much quicker than traditional financing can. After all, you need the proceeds right away to deal with whatever urgent expense is coming up.

Depending on your timeframe, it might make sense to look beyond traditional lenders. You see, banks have a tendency to be slow in funding business loan applications. This is why many CRE investors use commercial bridge loans from alternative lenders.

Many private companies and private individuals are actively looking for projects to back, and they may be able to fund your application within a few days. Working with a commercial real estate consultant can make the process even faster.

Prepayment incentives

In an ideal world, a commercial bridge loan will offer some kind of prepayment incentive. The goal is to pay it off early, after all, because this is a temporary loan by definition.

If you take on an amortizing bridge loan, you’ll save a lot of money when you pay it off early because you will avoid having to pay for interest. And if you take on a loan with a factor rate that requires you to pay a set interest rate no matter what, it’s important to make sure that it offers a prepayment discount.

If the commercial real estate bridge lender wants you to pay a large prepayment penalty should you pay the loan off early, keep looking. You might want to explore other options.

Where to get Commercial Bridge Loans?

As mentioned, there are different places you can turn to if you want to apply for commercial bridge loan financing. Banks will likely offer the best terms and rates, but their approval process is slow, and their requirements are stringent.

Don’t give up if a bank turns you down. In all likelihood, you will be able to get alternative funding from private sources. The interest rates will be steeper, but funding time is much faster, and the application process simpler.

Some commercial bridge loan lenders specialize in smaller projects (up to $500,000) while others can fund larger-scale CRE investments ($5 million and up). Interest rates can range anywhere from as low as 7% to as high as 30% APR. Funds are typically released in three days, but smaller projects may be funded within 24 hours.

Lenders have different standards when it comes to who qualifies for their bridge loans. Some require a minimum annual revenue, and some require a minimum credit score.

No matter what your situation, Capital Investors Direct can help.

We specialize in customizing commercial real estate bridge loans based on different needs and circumstances. Our approach is fast and flexible because we understand that your urgent loan needs can’t wait and that you need reasonable short-term financing fast.

Our bridge financing solutions are great for investors who want to take advantage of value-add, repositioning, and rehabilitation opportunities anywhere in the US. You can expect:

  • Same-day approval
  • Closing in as fast at four days (8 days for Jumbo Bridge)
  • Flexible requirements and lending criteria
  • Terms of 12, 18, and 24 months
  • Loan amounts of anywhere from $100,000 to $5M
  • Interest rates as low as 7.5% (8.5% for Jumbo Bridge)
  • Available for different asset classes, namely multifamily, retail, office, and mixed-use
  • Occupancy: none required
  • It can be used for different loan purposes, including cash-outs, partnership buyouts, repositioning, rehab, ground-up construction, finishing an under-construction project, etc.

Traditional loans from banks take a minimum of 45 days and involve a lot of paperwork. They are often unsuitable for CRE investors that are serious about succeeding in a highly competitive industry.

Capital Investors Direct can take care of everything for you, closing your bridge loan requirement in just a few days. Our bridge loan solutions are the perfect financing tools for investors looking to take advantage of opportunities right away.

Did a traditional bank reject your application because you don’t fit their onerous lending criteria for some reason or another? Try us. Our bridge loans and other financial solutions offer flexibility. Our private capital lenders network follows an asset-based lending philosophy, making it easier for you to get a loan quickly.

Capital Investors Direct is committed to giving you the best financing solution for your project. We take time to truly listen to our clients, so you can trust us to go above and beyond in finding and delivering the most suitable bridge financing solution for your needs.

You can rely on our team’s decades of experience, expertise, insight, and market knowledge when deciding on commercial property funding options.

To get started, simply fill out the form (it takes 5 minutes). We will review your application and tell you within 24 hours if you’ve been approved. The loan will be credited to your account within 4 to 7 days.

Want to talk to someone from our team? You can call us at (800).348.8120.

The Bottom Line

Bridge loans have a bad reputation for being high-interest loans—and that’s unfortunate. Used correctly and in the right circumstances, they can offer a great deal of traction, value, and financial savings in many instances.

Whether you need to close a deal quickly in a competitive market or want to make upgrades to a property before selling it, commercial real estate bridge loans can be funding solutions that deliver agility, flexibility, and many other advantages

That said, bridge loans are clever solutions to common funding problems. You are a borrower who needs to recognize that they carry a fair share of risks at the end of the day. Some borrowers who take on commercial bridge loans end up defaulting on the debt, unable to pay this high-interest loan.

Therefore, if you are thinking of using a bridge loan, you have to ensure that your investment will truly pay off.

Ultimately, only you can determine if a commercial bridge loan is right for your goals. This being said, it’s worth exploring your financing options with a commercial real estate funding advisor so you can make an informed decision.

You can account for us here at Capital Investors Direct. We can help you compare different CRE loan products to find the most affordable and desirable funding solution for your business.

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Capital Investors Direct funds different commercial properties across the country. Below are few commercial properties we lend hard money for –