Bridge Loans

 

What Are Bridge Loans and how do they work?

A bridge loan is an interim financing tool which is made available to a business until permanent or the next stage of financing can be obtained. Money from the new financing is generally used to “take out” (i.e. to pay back) the bridge loan, as well as other capitalization needs.

Bridge loans are typically more expensive than conventional financing to compensate for the additional risk of the loan. Bridge shadowed-oil-rigloans typically have a higher interest rate, points and other costs that are amortized over a shorter period, and various fees and other “sweeteners” (such as equity participation by the lender in some loans). The lender also may require cross-collateralization and a lower loan-to-value ratio. On the other hand they are typically arranged quickly with relatively little documentation.

A bridge loan is similar to and overlaps with a hard money loan. Both are non-standard loans obtained due to short-term, or unusual, circumstances. The difference is that hard money refers to the lending source, usually an individual, investment pool, or private company that is not a bank in the business of making high risk, high interest loans, whereas a bridge loan refers to the duration of the loan.

Bridge loan interest rates normally run around 12%, with typical terms of up to 12 months 2–4 points may be charged by the lender or intermediary. Loan-to-value (LTV) ratios generally do not exceed 65% for commercial properties, or 80% for residential properties, based on appraised value of the assets pledged. The loan may be closed, meaning it is available for a predetermined time frame, or open in that there is no fixed payoff date (although there may be a required payoff after a certain time).

Higher quality assets pledged in the loan may also attract lower rates, representing the lower level of underwriting risk although front-end fees, lenders legal fees, and valuation payments may remain fixed. HFS has a variety of “hard money” lenders available for client to use for this type of financing instrument. CONTACT US today for a free consultation.