Is Bridge Financing Right For You? – Finance and Banking

Bridge loans can supply short-term financing before developers
and investors cement long-term financing. Their popularity surged
during and in the wake of the Great Recession — and that
popularity has continued till this day. But if you are considering
obtaining a bridge loan as part of a new deal or a refinancing, or
for on-site improvements, you need to learn the potential pros and
cons.

PROS OF BRIDGE FINANCING

The typical duration for a bridge loan is 12 to 36 months. This
can give you the time to address issues that are preventing you
from securing traditional financing or taking advantage of other
opportunities. For example, bridge loans might help when you want
to:

• Close a deal with an impending deadline;




• Make renovations;




• Get a property out of foreclosure;




• Stabilize cash flows;




• Pursue environmental remediation;




• Replace a tenant; or




• Improve your creditworthiness.

If you are looking for long-term financing, you can choose to
pay off the bridge loan before or after you find it. You will
improve your odds of receiving that financing by making timely
payments on the bridge loan. Or, if you opt to pay it off after
finding long-term financing, you can apply some of those funds to
pay off the bridge loan.

In addition, bridge loans usually require less income
documentation and close more quickly than traditional loans,
getting the funds to you within a week or so. And they can be
nonrecourse, allowing you to safeguard other assets.

DRAWBACKS OF BRIDGE FINANCING

Bridge loans carry higher interest rates (usually based on
market-based rates), transaction fees and closing costs than
conventional loans. They generally also may require a high
loan-to-value ratio and a large balloon payment.

Bridge loans are more closely monitored by lenders than
traditional loans, too. As a result, you could incur costly
penalties when, for example, you fail to satisfy complex
debt-coverage ratios or debt-yield tests. If you plan to use
long-term financing to pay off a bridge loan, you will be left on
the hook for it if that financing does not come through. Should you
fail to timely meet the payoff, interest costs will pile up fast.
These concerns are particularly relevant given recent concerns
about a looming recession.

There is also no guarantee that you will qualify for a bridge
loan. Lenders tend to require exceptional credit, a low
debt-to-income ratio and a significant chunk of equity.

SEEK ADVICE

In the right circumstances, bridge loans can provide a flexible
and worthwhile solution to short-term funding needs. But they are
not without substantial financial risk, so tread carefully before
signing. Financial advisors can help determine whether a bridge
loan is right for your project and negotiate the optimal terms with
a lender.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.