Defining Commercial Bridge Loans for the Small Business Owner
As a small business owner, you know that financing a property can be difficult, particularly if you find a low cost option and want to renovate it but need the funding for the renovations, as well. Bridge loans could be the solution you need to solve your problem.
Bridge loans are short-term loans that will give you financing specifically for dealing with commercial property issues. The bridge loan will allow you to move forward with your business plans while waiting for the conventional financing to be put into place. This is particularly helpful when there is a limited time frame for the purchase of a commercial property. Once traditional financing is in place, the bridge loan can be repaid out of the funds from the conventional loan.
Though this seems like an easy option for funding a business venture, be aware that a bridge loan carries a higher amount of risk than a traditional loan. As such, the interest rates will be correspondingly higher, as well. A typical term for bridge loans is just six months to a year, though some lenders will allow an extension for an extra six months to a year. However, that extension comes with an additional fee, usually between half a point and two points. Though because of their short life-span, these kinds of loans don’t generally have any kind of prepayment penalty.
Consider this example for understanding how a bridge loan works: You’re under contract to purchase an apartment complex for $10 million. Though in a nice area, the building and units need some renovations. For this reason, only 60% of the apartments are currently occupied. You’ve carried out thorough research and come to the conclusion that after $3 million in renovations, the property value could increase to $22 million. The renovations will take between six months to a year, after which you can increase the cost of rent. To be able to carry out these plans, you can secure a commercial bridge loan for $13 million, enough to cover both the purchase and the renovations, by using the property as collateral. After renovations are complete, you can fill up the occupancy to almost 100% and secure a conventional commercial mortgage of $22 million. Using those funds, you can pay back the bridge loan in full.
Bridge loans are a short-term solution for financing when you need a commercial property loan. Though they have higher interest rates, they make it possible to carry out your real estate plans.