When someone needs capital for a short period of time, one solution can be to get a commercial property bridge loan if you have equity in commercial real estate that you can leverage.
The use of funds do not have to relate directly to the property such as a purchase, refinance, or investing in some type of improvements.
The funds can be required for just about anything. The key is that commercial real estate property is being provided as security to a lender.
Some of examples where a short term loan is required is 1) someone needs to close a sale quickly, 2) a business has an order they need to fill and need to supplement their working capital to get it completed; there is some sort of cost that someone is trying to avoid by having capital provided on time within the parameters of an agreement.
The financing amount is typically $500,000 or higher and the money is required quickly, or more quickly than can be arranged through a conventional bank.
When individuals or businesses come to us with this type of financing request, we arrange financing through our private lender net work and work towards getting the financing in place right away.
One of the benefits of this type of commercial mortgage financing is that the loan is fully open for repayment. So as soon as the need for funds has passed, the principal can be repaid right away without penalty or further obligation to the lender.
Bridge loans can be for several months, up to a term of 2 years for the most part.
In some cases, funds may only be required for a couple of weeks to close a transaction and the proceeds from the transaction will in turn be used to repay the loan.
When we get bridge financing inquiries, one of the first questions we get asked is how long will it take to get a short term loan in place?
Depending on the situation, the faster placements are in one to 2 weeks. On average, we can get funding completed from the time of application to cash advance in 2 to 3 weeks.
Part of the speed to getting deals in place is the getting the deal assessed quickly and immediately matching up the deal with an interested bridge lenders so most of the time is spent with the closing process.
If you’re looking for short term capital and have equity in commercial property to leverage, then I suggest that you give me a call so we can quickly go over your situation on the phone and provide options for your immediate consideration.
When looking to arrange bridge financing, at least part of the borrowing decision is going to be about the cost of capital versus the benefit you are going to get for putting a bridge loan in place.
To properly understand the cost//benefit relationship of any particular deal, you have to be able to accurately estimate the potential cost of capital prior to entering into a short term financing agreement.
Failing to do this may result in a higher cost than the value of the expected benefit, which in hindsight may have caused you not to acquire a bridge loan in the first place.
Depending on the specific lender providing short term or bridge financing, there can be a number of different cost elements to add into the projected cost of capital with some being more material than others.
For instance, there can be a different fee and cost structures from one institutional lender to the next and one private lender to the next.
This can also vary for business loans versus personal loans.
And yes, we are talking about projected cost of capital due to the fact that the effective cost of financing will vary depending on what transpires during the life of the loan.
Let’s break the costs down into fixed and variable components.
The potential fixed costs for the transaction can include legal fees, appraisal fees, environmental assessment fees, lender fees, and broker fees.
All these costs can be accurately estimated before any money is actually spent, but there can be some variability between what is estimated and the final cost paid.
For instance, legal fees can be quoted for the completion of a transaction or by time. Environmental assessments can require additional work which can lead to additional costs. Lender and broker fees are usually a percentage of the money borrowed, so if the amount of money to be borrowed goes up or down, these amounts will change as well.
The variable costs would potentially be things like transaction costs and prepayment penalties.
A lender will typically provide a list of service charges for different events such as NSF payment fees, partial discharges of security, and so on.
Prepayment penalties will be clearly spelled out, but will only be incurred in the event of prepayment prior to the completion of the loan term.
If you expect to repay the loan, or will need to repay the loan prior to the end of the term, then the prepayment penalty becomes a fixed cost.
Most bridge loans are for a period of one year, especially if they are backed by real estate security.
If you assume the worst case scenario and project that most potential costs are going to be incurred including prepayment penalties, then you would divide your total costs by the amount borrowed to arrive at an effective interest rate expressed as a percentage of funds borrowed.
But as I mentioned at the outset of this article, the cost of capital in dollars is the most important thing to understand so that you can determine if the value assigned to the benefits of acquiring short term financing outweigh the costs.
The actual interest rate expressed as a loan interest rate to be charged monthly or the effective rate of financing with all costs factored in is a secondary consideration to the actual projected cost of borrowing.
So once again, determining the worst case scenario and a likely case scenario will be important when evaluating a particular financing option as well as the cost/benefit relationship of the underlying deal.
Bridge loans by their very nature or definition, are short term loans or mortgages that are required to meet some form of short term obligation and in many cases the payout of the bridge funds in the first step in a process to get to the exit strategy that will repay the funds.
So first and foremost, there is a certain amount of transaction risk that comes into the equation for lenders.
Because the transaction to be completed and the related process required to get to an exit strategy to repay the bridge, has actions that need to be completed by one or several people, the transaction risk can be considered to be significant, even when all the pieces are lined up.
The result with respect to the cost of capital is that there is higher risk premium attached to most bridge financing transactions as compared to a more conventional transaction.
In addition to transaction risk is market supply and demand factors.
There are significantly less lenders in the market that will do bridge financing as compared to more traditional financing.
The lenders that do partake in this market have the skill set and resources to facilitate these types of deals including managing the exit strategy that will return their money.
Because the supply side for these types of deals can be lower than the demand side, especially when you build in the regional focus of most private lenders, there is a premium attached to these types of deals.
Another characteristic of bridge lenders is that they need to be able to assess and fund quickly as most bridging lending scenarios have very short timelines to work with.
In many situations the reason for the bridge financing in the first place is because some other form of capital or specific event to a transaction did not materialize when it was supposed, facilitating the need for another source of capital with the time remaining to complete whatever the deal is.
So in order to get bridge financing in place, the lender not only has to do this type of lending, but be able to do it quickly, which further reduces the amount of supply in the market place.
Speed is also the reason why either residential or commercial property financing is a preferred form of bridging due to the speed in which a property can be evaluated and taken as security.
Add all these factors up and you end up with a higher cost of financing related to risk, supply, and speed.
Borrowers on the other hand will argue that if all the pieces in the process to repay the bridge are in place that there should not be a higher cost of financing attached to these loans.
But this argument only holds true if there are several lenders in the market that would go along with the logic, which there typically is not, so we are back to the issue of supply and demand.
Bottom line, bridge loans save a lot of deals and even though the cost of capital may be higher than what you’re used to paying, the total cost of financing for a bridge loan may be a mere fraction of what you out of pocket cost or opportunity cost is if the funds are not made available to your deal in the time you have to complete it.
If you require a bridge loan and have assets to leverage, I suggest that you give me a call so we can quickly assess your situation and provide financing options for your immediate consideration.