United States: Is bridge financing right for you?
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Bridge loans can provide short-term funding before developers and investors cement long-term funding. Their popularity grew during and following the Great Recession – and that popularity has continued to this day. But if you’re considering getting a bridge loan as part of a new transaction or refinance, or for on-the-spot improvements, you need to know the potential pros and cons.
ADVANTAGES OF BRIDGE FINANCING
The typical duration of a bridging loan is 12 to 36 months. This can give you time to work through issues that are preventing you from getting traditional financing or taking advantage of other opportunities. For example, bridging loans can help you when you want to:
- Conclude a transaction with an imminent deadline;
- Make renovations;
- Get a property out of foreclosure;
- Stabilize cash flow;
- Pursue environmental remediation;
- Replace a tenant; Where
- 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 chances of receiving this financing by making timely payments on the bridge loan. Or, if you choose to pay it back after finding long-term financing, you can use some of those funds to pay off the bridge loan.
Plus, bridging loans typically require less proof of income and close faster than traditional loans, allowing you to get the funds in about a week. And they can be non-recourse, allowing you to protect other assets.
DISADVANTAGES OF BRIDGE FINANCING
Bridge loans carry higher interest rates (usually based on market rates), transaction fees and closing costs than conventional loans. Typically, they may also require a high loan-to-value ratio and a large lump sum payment.
Bridge loans are also more closely monitored by lenders than traditional loans. As a result, you could incur costly penalties if, for example, you fail to meet complex debt coverage ratios or debt yield tests. If you’re considering using long-term financing to pay off a bridge loan, you’ll be left behind if that financing doesn’t materialize. If you fail to meet the timely payment, interest charges will accrue quickly. These concerns are particularly relevant given recent concerns about an impending recession.
There is also no guarantee that you will qualify for a bridging loan. Lenders tend to require exceptional credit, a low debt-to-equity ratio and a high equity component.
ASK FOR ADVICE
Under the right circumstances, bridge loans can provide a flexible and worthwhile solution to short-term financing needs. But they are not without substantial financial risk, so be careful before signing. Financial advisors can help you determine if a bridge loan is right for your project and negotiate optimal terms with a lender.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.
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