How Bridge Lending Can Unlock Business Opportunities
In business, crises and opportunities can suddenly appear out of the blue that demand immediate financial action. You could apply with a standard lender for a conventional loan, but in the time it takes them to make a decision, the crisis may have worsened, or another company could have beaten you to a lucrative opportunity. For situations like these, bridge lending might be the answer.
In this article, we’ll examine:
What bridge lending is
How to apply for a bridge loan
Bridging loan fees
Repaying a bridge loan
The maximum bridge loan amounts
The advantages that bridge loans offer
What Is Bridge Lending?
Bridge loans, sometimes called hard-money loans or swing loans, are a type of short-term financing designed to bridge a funding gap.
In basic terms, you have an immediate need for cash, but long-term financing solutions (sometimes called permanent financing options) are not suitable because:
The application process will take too long.
The lender won’t advance you money for the reason you need it.
You don’t have collateral the lender is interested in.
You or your business have a poor credit score.
In these cases, you might turn to a bridge lender instead. You also seek bridge lending to close a cash flow gap while you wait for a longer-term solution to come through or for another expected influx of capital.
Lenders that offer bridge loans give short-term loans to companies when there is a defined second event or “exit strategy” that will repay the facility in full. They also aim to turn around applications much quicker than standard lenders.
What Are Some Bridge Lending Use Cases and Exit Strategies?
Let’s consider what a bridging loan “exit strategy” might look like. In this first example, we’re considering the case of a company with multiple factories.
Each factory manufactures one particular line of products. The management has decided that one of those lines of products is not profitable enough. It would cost too much for them to upgrade the factory manufacturing the item they’re discontinuing so they’ve decided they want to sell it. They intend to use the proceeds of the sale to invest in advanced machinery for their remaining factories to increase production and efficiency.
The problem is that they’ve not sold the factory yet, so they don’t have the money to buy the machinery. They would consider equipment financing, but they don’t have enough cash to put down a 20% deposit on the machinery right now.
They approach a bridge loan lender to see if they can help. The bridge lender agrees to lend them the money they need to buy the machinery on two conditions. First, they use the factory as collateral on the facilities, and second, they repay the loan in full with the proceeds of the factory sale.
By using bridge financing, the company manages to secure the equipment they need without having to find the down payment for the new machinery.
Other examples of exit strategies on commercial bridging loans include:
Going for an IPO: When a company lists itself on the stock market, the fees can be very high. In these cases, a business may take out a bridging loan, which they then repay when they’ve received money from investors buying shares.
Investment funds: If a great opportunity comes in but an investment fund doesn’t have immediate access to the money their investors have pledged, they can borrow the money they need to pay for the investment. (This is also known as equity bridge financing.) The bridge loan is then repaid when the capital does come in or, sometimes, from the returns they’ve made from the investment.
Acquisition financing: When one company takes over another, it may access short-term bridge funding to pay for the acquisition. Acquirers repay the funds with either long-term financing or by merging in the purchased company’s cash flows with their own.
How to Apply for a Bridge Loan
When companies apply for a bridge loan, they approach a lender or a broker for assistance. Some banks and credit unions also offer bridge loans.
During the initial consultation, the lender or broker will let the company know if a bridge loan is suitable for their situation. They’ll consider:
How urgently the company needs to borrow the money
Their available collateral (like assets, commercial real estate, accounts receivable, and so on)
The viability of their exit strategy
If the lender or broker thinks bridge lending would be a solution for the company, the borrower then makes a loan application. They generally have to supply a lot of documentation to the lender, like their financial statements.
The lender’s underwriters will now run due diligence checks on the borrower. Some lenders may check a company’s DSCR score, a measure of their debt-to-income ratio as well as personal and business creditworthiness. However, most lenders place a higher degree of importance on the value and liquidity of the collateral than on credit history.
With a bridge loan, this normally happens a lot faster than with a long-term business loan. From application to completion, it can take as little as a few working days to be approved.
If the lender does approve the application, they send the borrower a loan offer. It’s then up to the borrower whether they wish to proceed or not.
What Are the Typical Bridging Loan Fees?
The fees charged by lenders vary, but borrowers may pay some of the following charges on their bridge loan:
Appraisal fees: This is an independent assessment of how much the assets you’re offering as collateral are worth.
Broker fees: If you use a broker to arrange your loan, you may have to pay them either a flat fee or a percentage of the value of the loan.
Title policy costs: On real-estate-related loans, this pays for title insurance, which protects you against any losses caused by defects in the title deeds if the mortgage liens can’t be enforced.
Notary fees: Also on real estate loans, this is what the notary public charges for verifying the identity of the people signing the loan agreement and witnessing the signing.
Legal and administrative fees: These are general costs levied by the lender associated with preparing and reviewing your loan documents.
Interest rates: Bridge loans often have higher interest rates than other types of business loans. They may be comparable to the high interest rates on a credit card, depending on the lender. Increased loan rates are one of the few cons of bridge loans.
Origination fees: This is usually a percentage of the value of your loan for processing your application.
Closing costs: You’re charged this fee when you’ve secured your loan.
A lender or broker can let you know if any of the above fees will apply to the type of bridge lending you’re seeking.
How Are Typical Bridge Loans Repaid?
Compared to standard commercial loans, the way bridge loans are distributed and repaid can be different. This is the likely sequence of events for a typical bridge loan:
Disbursement of cash: Borrowers receive a lump sum of money, minus fees, paid into their bank account. Some types of bridging loans, especially those involving real estate, may only transfer a proportion of the money to start off with. Further tranches will be transferred at certain agreed milestones following inspection by the lender or their representative.
Repayments: On nearly all bridge loans, unlike mortgage loans and other types of finance, borrowers make no monthly payments on either the capital (the money they’ve borrowed) or the interest (the charge on the money they’ve borrowed). On some loans, a monthly interest-only payment may be collected.
Final settlement: The lender is repaid in full, including any fees, once the exit strategy has been successfully achieved.
Refinancing: If a borrower is unable to achieve the exit event, they may look to another bridge lender to refinance the deal. Although not unheard of, it’s rare for a lender to roll over a facility.
Average loan terms on bridging finance deals are usually up to 12 months, although some lenders may offer windows of up to 36 months.
What’s the Maximum Amount That Can Be Borrowed With a Bridge Loan?
Typically, the maximum amount a company can borrow with a bridge loan is a percentage of the assets it offers as collateral.
This is referred to as loan to value (LTV).
As with other secured loans for business, what you’re offered depends on the “quality” of the assets. If you offer your inventory, you might be offered 50% of its value when applying for a bridge loan.
Accounts receivable (unpaid invoices you’ve sent to clients) and equipment and machinery with a long life span that holds its value might get you up to an 80% offer. Using real estate as collateral might get up to 90% depending on its condition.
So, if you offer $1 million as collateral of real estate in good condition, a bridge lender may be able to advance you $900,000.
With an alternative lender like Backd, companies can borrow up to $2 million.
Maximum Amounts for Real Estate Bridge Loans
Real estate investors can apply for a bridging loan that also incorporates elements of a construction loan. The way LTV is applied to these types of loans is different.
Real estate investors may buy an old commercial property to renovate it. They may buy empty land to build a new home on it or a tower block containing multifamily units.
In these cases, they can borrow up to 75% of the project’s “after repair value” (ARV) and not the purchase price of the property or the land. In other words, the lenders will advance a percentage of what the new property will be worth after it has been built or the existing one renovated.
For these types of projects, a traditional mortgage, whether residential or commercial, is unsuitable. The exit event on these types of bridging loans is a sale of the property. If there is a seller’s market at the time, that’s great. However, if the real estate market is poor or the intention was always to rent out the property, they’ll arrange a new mortgage on it once the project has been completed.
Advantages of Commercial Bridging Loans
The six key advantages of commercial bridging loans are:
Fast access to cash: You can be funded within days with a bridge loan. Other types of commercial finance can take weeks or months to process. If you need to plug a cash shortfall or you need money to take advantage of a time-limited business opportunity, bridge loans may offer the speed you need.
Flexible repayment terms: Bridge lenders offer adaptable terms on each loan, bespoke to the situation the funding is designed to address. Borrowers can also negotiate on loan amounts, interest rates and repayment schedules.
Variety of use cases: As long as your exit strategy is viable and you have any required collateral, you have the chance of finding a lender to advance you funding for situations specific to your business. It’s a very adaptable form of boutique financing.
Different types of collateral accepted: Most traditional loans have very specific collateral requirements, whereas bridge loans can be secured against a wide range of assets from inventory to real estate. Borrowers can piggyback different types of assets together to increase the amount they can borrow.
Cash flow management: Bridge funds provide liquidity to businesses, making them an excellent tool for financial management. Lenders can introduce cash just when it’s needed for restructuring, off-season periods, real estate purchases, and more.
Short-term commitment: Your company can borrow money for just as long as it needs. In addition, there are often no prepayment penalties with bridge loans either. Instead, if a borrower pays their loan back before the agreed closing date of the facility, they save money.
Secure Your Clients’ Success With Backd Bridge Lending
Bridge loans help companies by providing them with the financing they need quickly to plug short-term problems or take advantage of longer-term opportunities.
Backd offers finance solutions of up to $2 million with flexible repayment plans in as little as 24 hours. We invite ISO brokers to partner with us so that your clients have the option of working with us when they need short-term funding.
To find out more, please get in touch with us.
