Capital & Finance Blog

When and How to Use a Bridge Loan

Bridge loans help property owners by giving them time to sell a property, make certain improvements or find a new tenant. Whether or not your business is a suitable candidate for a mortgage bridging loan depends on why you need it, how you intend to use the funds and what the likelihood is that you can pay it back in a short period of time.

Bridge Loan Mortgage Basics

Bridge loans help property owners manage a cash crunch and lenders expect these owners to pay more for the privilege. As a result, terms usually include an interest rate premium of 3% or more over the standard mortgage lending rate as well as a short term, often six months to a year, and points. On the plus side, bridge loans usually do not feature prepayment penalties, so paying sooner rather than later is advantageous for the borrower.

Once the owner finds a new tenant, completes the improvement or sells the property, the bridge loan is repaid through the new influx of funds. The owner then secures permanent financing at rates and terms much friendlier than what the original bridge loan offered. As with all loans, business owners with excellent credit and significant collateral secure the best bridge loan terms.

When to Use a Bridge Loan

Bridge loans are best suited to borrowers who have established businesses with ample finances. A commercial landlord who wishes to improve an existing vacant property and is confident that doing so will result in higher income from a future renter is a likely bridge loan candidate. Following completion of the work, the landlord secures higher rents and refinances the expensive bridge loan into a long-term loan with friendlier terms.

Borrowers with uncertain income or less-than-average credit will find securing a non-equity bridge loan much more difficult. These borrowers may find the funding they need with a hard money bridge loan lender, which will lend based on the available equity.

Securing Favorable Terms

You can secure the most favorable mortgage bridge loan terms possible by paying your current debt obligations on time and as per the agreed terms. Finally, create a business plan that is error-free and demonstrates clearly your planned use of funds.

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Finding a Small Business Loan

Established businesses that wish to find funding often encounter difficulty. Major lenders’ credit and collateral requirements, income guidelines and more demonstrate daily how difficult it is to get a small business loan. If your established business needs capital but you need help finding small business loans, consider these tips.

Begin at the Beginning

Before you begin, make sure your own financial house is in order. Order your credit reports and examine them carefully for errors; ask for corrections if necessary. Businesses and individuals that pay their bills on time and in full while maintaining long-established banking relationships with a mix of loan types will have the easiest time securing financing.

Sources

Traditional lenders, the Small Business Administration and the Internet are your best resources for researching and securing a small business loan. Although top-tier borrowers may find traditional lenders the best source, don’t overlook the SBA and the Internet.

The SBA offers several resources for small business owners. As always, rates and terms are credit- and collateral-dependent; those with less-than-sterling balance sheets and FICO scores will pay higher rates initially, but establishing a consistent repayment history may make refinancing a possibility 12 months or more down the road.

Internet-based sites, such as CNF Exchange, offer small business borrowers the opportunity to connect directly with lenders and investors to create mutually beneficial loan terms. Instead of calling and negotiating with lenders directly — a process that can take several weeks, if not months — Internet-based lending exchanges significantly reduce the amount of research required to find a suitable lender.

Desirability

Even with Internet-based lending, the most qualified businesses will find the friendliest terms because they are low-risk borrowers. For you and your business to become a low-risk borrower, build and maintain a solid credit history by always paying your bills on time. When you apply, check your application carefully for errors and sloppy typos. Be prepared to produce cash flow, income and balance sheet statements, as well as a use of proceeds statement.

Remember, banks want to make money on your loan but they also expect repayment in full. Demonstrating how you’re capable of meeting that expectation will make you a safer, savvier borrower.

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Signs That You Should Refinance

It’s no secret that today’s lending environment is the friendliest for well-qualified borrowers than it’s been in decades. Securing a 30-year fixed rate loan in the 3.5 percent range is not only realistic, it’s become downright commonplace.

Before you run to your local loan officer, however, consider carefully when you should refinance a mortgage. Because while many assume refinancing is an automatic income statement win, banks are not by nature altruistic.

You’ll Qualify for the Rate You Want

Your first and most important consideration comes after carefully assessing your own finances. Although advertised rates are indeed attractive, many if not most borrowers may not qualify for them. Banks reserve premier rates and terms for the most well-qualified buyers. If your credit is excellent, you have ample equity and your income is (and has been) rock-solid, you’ll likely receive the friendliest terms.

Staying Put Is the Plan

Unless your refinance plan is to maintain your existing payment but shorten the term, remember that refinancing will restart your debt clock. If selling the property in question is likely over the next 7 years, the money you save every month on a lower payment may not work to your advantage when it’s time to sell, because the first several years’ payments apply to interest instead of principal.

You’re Not Rolling Existing Debt into a New Loan

Lending officers might have you believing that rolling other debts into your new refinanced loan is wise, and it most likely will free up your cash flow; however, consider that many debts may be paid off within five or so years. Extending those loans to 15- or 30-year terms may wind up costing you more since you’ll be free and clear of the original debts long before your new mortgage loan ends.

As a result, refinancing works best for those who have accumulated significant equity and are able to maintain existing payments with shortened terms. If reducing your payment is the goal, avoid trapping yourself by rolling other debts into the new loan and look for other areas to save instead.

You’re a Savvy Borrower

Finally, if you have ample time to study loan terms and have no trouble walking away from a bait-and-switch deal, refinance. If you can’t meet all these criteria, reconsider your plan.

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The Future of Commercial Mortgage Rates

Low current commercial mortgage interest rates, slowly improving property values and increasing investor demand have spurred a flurry of activity in a sector that’s been quiet for years. But what do higher loan-to-value ratios and loosening borrowing standards mean for commercial lending rates?

Frothy or Healthy?

The Wall Street Journal reported in November of last year that borrowers, anxious to secure property loans in a low-interest-rate environment, completed approximately $46 billion in commercial mortgage bonds in 2012. In 2013, the WSJ anticipates that number to increase to $65 billion. And as if that increase weren’t astonishing enough, mezzanine financing, which the Journal reports was even harder to come by than commercial mortgage financing, is growing as well.

Established businesses with less-than-ideal credit are finding lenders saying “yes” when as recently as a year ago a firm “no” would have been assured. But with Treasury Secretary Benjamin Bernanke’s stated intent to keep interest rates at or near zero, lenders are struggling to assure yield.

Although the credit watchdogs at Moody’s worry loosening lending guidelines may put businesses — and the economy — in jeopardy once again, the coming year is unlikely to see either a significant boost in rates or a clampdown on lending.

What it Means

Well-qualified commercial borrowers with excellent credit and adequate collateral are likely to enjoy a favorable lending environment for the near- to mid-term of 12 months or possibly longer. Not-as-well-qualified borrowers won’t enjoy the historically low rates that their healthier counterparts do; however, as lending standards loosen over the course of the next several months, they may find more options exist.

These borrowers, once shut out of the lending market entirely, will find increased competition for their business, resulting in dropping rates for the less-qualified buyer over time. The combination of an expanded pool of eligible borrowers with high property inventory and the potential opportunity to refinance to a still-low rate down the road mean one can expect to see higher real estate prices and reduced rates for riskier borrowers overall.

And the Treasury? One cannot imagine higher interest rates until real estate and employment are back on well-established paths of growth.

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