Detroit, MI | January 31, 2023 03:58 PM Eastern Standard Time
Financing a purchase or refinancing a loan can be difficult — especially if you don't have adequate credit history. But there are several options available that can make the process easier. One borrowing option is a bridge loan, which can cover the gap between your current financing and the long-term financing you are waiting for. Bridge loans differ from long-term loans in that they have shorter terms and a higher interest rate than long-term loans. They are only a temporary solution until you have obtained the long-term financing you need. This article will help you understand the ins and outs of getting a bridge loan, using it correctly and dealing with lender requirements.
What Are Bridge Loans?
A bridge loan is a specific type of short-term loan that is used to cover the gap between when you make your purchase or refinance your current mortgage and when you have a long-term financing option in place. This type of financing is often used by small-business owners who want to purchase real estate, equipment or other capital-intensive business needs but lack the necessary funds to do so. Several types of bridge loans are available to help you meet your financing needs while waiting for the long-term financing you are looking for.
How Does a Bridge Loan Work?
While a traditional mortgage can cover you for up to 30 years, depending on your income and other factors, a bridge loan is used only for a specific amount of time. You can usually apply for one right after you receive approval for your mortgage, and your lender can help you determine which type of bridge loan is right for you. Many types of bridge loans are available, and they vary in the amount you can borrow, interest rate, fees and other conditions.
Each type of bridge loan has slightly different eligibility requirements you must meet to be approved. You will also need to provide the lender with certain information about yourself and your business. Your lender will need to know your personal and business credit score and the income and credit history of your business and its owners. It is important that you understand what you are getting into before you agree to the loan terms.
Steps to Getting a Bridge Loan
If you’re seeking a bridge loan, these are the steps you need to take to make sure you can get one.
Step 1. Find a lender
Just like when you are applying for a traditional mortgage, the first step in getting a bridge loan is finding a lender that will approve your application. Because bridge loans are less common than standard mortgages, you will have limited options when it comes to lenders. Some of the lenders that may be able to work with you include banks, mortgage brokers and other financial lenders. It is important to shop around and compare your options to find the one that best meets your needs.
Step 2. Apply for a loan
After you find a lender to work with, you will need to apply for a bridge loan by submitting the application and supporting materials requested by the lender. In most cases, you will be asked to submit the following documents:
Completed loan application form
Personal financials with assets and liabilities
Proof of income and employment history
W-2 forms and tax returns
Copy of federal ID
Credit report and credit score
Income and asset information for the owners of the business being financed
Most lenders will require at least three years of income tax returns for the applicant as well as proof of ownership for the property being financed. Additionally, most lenders will require you to provide personal financial statements documenting your assets and liabilities as well as your monthly income and expenses. Some lenders may also require an appraisal of the property being financed to determine the value of the property and whether it meets the minimum value requirements for a bridge loan.
Step 3. Wait for a decision
Once you have submitted the necessary documentation to your lender, it will usually take between one and two weeks for your application to be reviewed, but some lenders have fast financing options that can happen within days. This may not always be the case, however, as some lenders may take longer to provide you with a decision than others. Regardless, getting a decision for a bridge loan is generally always faster than getting approved for a long-term loan.
Bridge Loan Example
Say you are moving your dispensary to a new and improved brick-and-mortar location, but the property where your store is currently located is not yet for sale, sold or vacant. In this situation, you could take out a bridge loan to finance the purchase of the property until you are ready to sell it. You would use this loan to purchase the property until you are able to sell your current property and repay the bridge loan with the proceeds of the sale. This approach would allow you to take advantage of the low-interest rate associated with bridge loans while still giving you time to sell the property or find another financing option if you are not able to sell the property in a reasonable amount of time
Considerations With Bridge Loans
Reading a loan agreement carefully to make sure you understand everything before signing it is just as key as a traditional loan. Paying attention to bridge loan terms will help ensure that you do not default on the loan. If you fail to make payments on your loan, the lender will have the option to take the property back or pursue legal action against you to recover the debt. The lender will also have the right to seize your property if you become delinquent on your mortgage payments. To avoid any problems down the road, make sure you fully understand the terms of your loan before you agree to them.
Do Costs Outweigh the Benefits?
Bridge loans can be 2% of the total cost of the loan, on top of the thousands of dollars it can cost to get the loan and other fees. If you need the loan, but don’t have the cash flow to deal with excessive costs, the costs might outweigh the benefits for you.
Can You Repay The Loan?
A bridge loan is generally only taken out when you know a longer-term loan is on its way, that way the longer-term loan can pay back the bridge loan. If you can’t pay off your bridge loan you can lose the property or equipment you’re trying to buy.
Is a Bridge Loan Right for Your Needs?
Aside from bridge loans, plenty of other short-term loan options are available. Bridge loan alternatives include:
Home equity lines of credit (HELOCs)
Bridge Your Financing Gap
A bridge loan can get you where you need to get faster, but is a bridge loan the right thing for you? If the terms are correct for your situation, a bridge loan can get you out of a financial bind, but make sure you understand what you’re signing up for to create the perfect plan to get your business in the right place.
This post contains sponsored advertising content. This content is for informational purposes only and is not intended to be investing advice.
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