BRIDGE LOAN FINANCING BENEFITS AND RISKS

Bridge loans are a form of debt financing typically used when real estate developers and businesses need quick, short-term financing to meet immediate needs for a few months up to a year or so. Bridge loans allow the user to meet current obligations by providing immediate cash for opportunistic and immediate needs.

Most bridge loans are typically asset-based and backed by collateral such as real estate, equipment or inventory. It is always a short-term loan, typically until longer term permanent financing is secured or until cash is injected to pay it off, such as from an impending asset sale. So lenders are looking for a viable exit strategy at the point of requesting the loan. Examples include:

• To quickly purchase an income producing real estate property, such as a multi-family or commercial building

• To acquire and renovate an existing commercial building to re-lease at higher rates after the renovations

• Business working capital required to prepare for expansion, another financing event or to build inventory prior to a peak sales season

• To carry a company through an interim period before an IPO or an acquisition

• To acquire equipment where fast closings are needed, such as auction purchases and distressed opportunities

Benefits of Bridge Loan Financing

The concept behind a bridge loan is that it is easier and quicker to obtain, unlike a traditional long-term commercial loan.

Bridge loan financing can be used for creative situations, such as time-of-the-essence closings, distressed borrowing to avoid credit issues or bankruptcy, bridge to stabilization, opportunistic purchases, construction completion and other special circumstances.

Bridge loans close fast, as required by this form of lending. Closings within 15-30 days of a term sheet are common.

Prepayment options are often included so the company can pay off the bridge loan at any time without a prepayment penalty. Bridge loans are typically designed to be repaid in full by the time long-term financing is secured. This makes them more flexible for companies seeking longer-term financing.

Some bridge lenders also provide longer term financing options, and creative customized bridge solutions for unique financing requirements to suit a variety of business needs.

Risks of Bridge Loan Financing

Financing costs are typically higher given the fast speed of closing, so bridge loans are used primarily as a short-term solution and not a long-term financing tool. Borrowers are willing to pay higher interest rates and loan origination fees to quickly secure the capital needed or risk losing an opportunity.

The borrower must repay the loan more quickly than on a longer-term loan, so the debt servicing payments will be larger. Lenders may also charge additional fees and penalties on late payments.

Bridge loan financing relies on more permanent financing being available, or an impending cash injection such as the sale of an asset.

The borrower must repay the loan more quickly than on a longer-term loan, so the debt servicing payments will be larger. Lenders may also charge additional fees and penalties on .late payments.

Bridge loan financing relies on more permanent financing being available, or an impending cash injection such as the sale of an asset.