Bridge loans provide short-term financing to bridge the gap between immediate financing needs, and longer-term mortgages. These short-term loans can provide the borrower with urgent funding needs for new and existing projects.
There are a variety of reasons why Bridge loan financing is very beneficial to lenders and developers. This type of financing is non-recourse, has a flexible loan structure, enables quick decision-making process, and can be obtained for various types of properties. The financing period can range from several months up to a couple of years.
One of the main benefits of bridge loans is the speed of the process. Typically, the timeframe required for traditional bank loan processing from origination to closing can be lengthy. Especially if borrowers require a time sensitive funding solution or if the project lacks sufficient stable cash flow. Bridge loans are short-term by their nature, which in turn enables alternative lenders to significantly speed up and shorten the process vis-à-vis more traditional lenders.
To enable the above-mentioned speed of the funding process, the main factors that influence the decision-making process are the value of the property and the experience and ability of the borrower to carry out the proposed business plan for the property. Therefore, bridge loans are typically non-recourse.
Bridge loans tend to be highly beneficial and often the preferred type of funding in the following:
- Redevelopment of existing properties
- Repositioning of an underperforming property
- Short closing deadlines
- Deals involving foreign nationals
- Recapitalizations/Debt Restructuring or Partner Buyouts
- Highly structured transactions
- Funding needs where traditional lenders such as banks will not approve the loan or require a lengthy and rigorous process.
Unlike in short-term financing, regulatory and other requirements impact the ability to secure longer-term loans. Therefore, bridge loans often tend to be offered by unregulated and non-traditional lenders. In addition to the normal regulatory requirements of traditional lenders in approving long-term loans, the borrower’s credit history and financial strength also play a central part in the decision process.
It is important to note that while bridge loans are the more lucrative option for various financing needs, there are also certain disadvantages that may be associated with this type of short-term financing. One such disadvantage is the higher interest rates that may be demanded, especially when properties are considered more higher risk due to renovation needs and other similar issues.
Additionally, to cap the financial exposure of the loan, many lenders will not agree to exceed 80%-85% of the property cost basis, However, this is often still higher than the threshold of traditional lenders, since bridge lenders rely on the borrower to rectify the issues that prevented the approval of long-term financing to begin with. And the upside is that once the issues are solved, the property can be sold or refinanced through traditional lending channels as it will now meet the required criteria.