Bridge loans offer access to short term financing designed to bridge the gap between an immediate funding need and a future source of income. They are pretty popular among real estate investors looking to obtain new properties quickly. Businesses also use bridge loans for expansion, relocation, capital improvements, and other needs.
Every type of loan comes with repayment terms. Bridge loans are no exception. But there are some unique aspects to bridge financing that are worth considering before applying for a bridge loan. Let us take a look.
1. Loan Term
Bridge loans are designed to be short term loans. Typically, they have terms of 6-36 months. They are offered by both traditional financial institutions and private lenders. According to Actium Partners in Salt Lake City, UT, private lenders tend to prefer the shortest terms possible.
On average, borrowers are looking at 6-12 months with a private lender. Should circumstances dictate a 24-month term, it can usually be arranged. Private lenders are rarely willing to go beyond 24 months on a bridge loan.
2. Repayment Structure
Commercial lenders are limited in how they can structure bridge loans. Private lenders are not. They have a lot more flexibility to serve unique borrower needs. With that in mind, there are three things to consider in terms of repayment structure:
- Interest-only Payments – The majority of private bridge loans are structured as interest-only loans. Borrowers only make interest payments during the loan term. The principle is due only at maturity.
- Balloon Payments – Buy design, an interest-only loan requires a balloon payment at the end of the term. That balloon payment includes the entire principle, the final interest payment, and any other fees applied to the loan.
- Amortized Payments – Although rare, some commercial bridge loans are structured as amortized loans. This means the borrower pays both interest and principle with each monthly payment.
3. The Pay Rate Structure
Private lending flexibility allows lenders to offer what is known as a ‘pay rate’ structure instead of the more traditional interest-only structure. Under the pay rate option, a borrower pays a reduced interest rate for the term of the loan. At maturity, he pays the remaining interest plus principal.
A pay rate structure combines the best of the interest-only and balloon payment options in a loan that ultimately means lower monthly payments for the borrower. But having to come up with more cash at maturity can make this type of loan risky.
4. Loan Flexibility and Customization
Another benefit of the flexibility private lenders bring to the table is the opportunity to customize bridge loans on a case-by-case basis. A lender can customize terms based on a borrower’s specific needs. Rates and terms can be customized according to a property’s future value or cash flow. Even non-recourse options for larger loans are possible.
Customization is one of the driving forces behind seeking a bridge loan from a private lender rather than a traditional banking institution. Private lenders can do things that traditional lenders cannot.
Two final things to note:
- Lender LTVs – Private lenders utilize loan-to-value (LTV) ratios just like their traditional counterparts. Their LTVs are almost always lower than what banks offer.
- Assessed Fees – Private lenders also assess the same types of fees on their loans. For example, origination fees on commercial bridge loans are standard.
When a real estate investor or business needs quick, short-term financing to meet an immediate need, a commercial bridge loan could be the best choice. It is just a matter of deciding between a traditional or private lender. Private lenders bring a lot more to the table.