A bridge loan is a short-term loan used to bridge the gap between buying a home and selling your previous one. Sometimes you want to buy before you sell, meaning you don't have the profit from the sale to apply to your new home's down payment.

 

Bridge Loans

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Need cash fast? Was your property supposed to close yesterday? Whether you are purchasing or refinancing, our bridge loan is perfect for you. Don’t miss out on your next investment OPPORTUNITY for lack of funding! Our bridge loan program provides fast, interest-only funding for new purchases and refinance projects of all types.

 

Whether you’re purchasing or refinancing, a bridge loan may be for you. A bridge loan offers a quick close and term flexibility. Send us your scenario, and we’ll let you know if a bridge loan is the best option for your project.

 

Example of Bridge Financing

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Bridge financing is quite common since there are always struggling companies. It can also be more prevalent in capital-intensive sectors. For example, the mining sector is filled with small players who often use bridge financing in order to develop a mine or to cover costs until they can issue more shares—a common way of raising funds in the sector.

Bridge financing is rarely straightforward and will often include a number of provisions that help protect the entity providing the financing.

A mining company may secure $12 million in funding in order to develop a new mine which is expected to produce more profit than the loan amount. A venture capital firm may provide the funding but, because of the risks, charge 20% per year and require that the funds be paid back in one year.

Bridge financing can be an expensive way for a company to raise capital and isn't generally the preferred option to raise funds.

The term sheet of the loan may also include other provisions. These may include an increase in the interest rate if the loan is not repaid on time. It may increase to 25%, for example.

The venture capital firm may also implement a convertibility clause. This means that it can, if it wishes, convert a certain amount of the loan into equity at an agreed-upon stock price. For example, $4 million of the $12 million loan may be converted into equity at $5 per share at the discretion of the venture capital firm. The $5 price tag may be negotiated or it may simply be the price of the company's shares at the time the deal is struck.

Other terms may include mandatory and immediate repayment if the company gets additional funding that exceeds the outstanding balance of the loan.

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What Are the Cons of Bridge Financing?

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The biggest risk of bridge financing is digging into a deeper hole. These loans tend to come at a high cost and need to be paid back quickly. Equity bridge financing is often expensive, too, and can involve giving up shares at a big discount.

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Can a Bridge Loan Be Paid off Early?

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Most bridge loans don’t carry prepayment penalties, although it’s worth checking to be sure. The added flexibility of being able to pay off the loan ahead of schedule is a definite benefit. If an alternative, cheaper source of funding is secured, the loan can be paid off immediately, helping the borrower to potentially save on interest charges.

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What Is the Main Advantage of Bridge Financing?

 

Bridge financing can give companies a much-needed short-term cash injection to

temporarily cover the costs of running the business or get the wheels rolling on an important investment or project. If there’s no alternative or the payoff promises to be greater than the cost, it can be a worthwhile option to pursue.

Heightened APRs: 

Bridge loan interest rates are typically higher than traditional mortgage rates. Risky terms: Bridge loans have short repayment periods, interest-only payments and balloon payments. These terms can be risky if your home doesn't sell as expected or its value drops. 

Bridge loans are usually arranged within a short time and with little documentation. For example, if there is a lag between the purchase of a real estate property and the disposal of another property, the buyer may take a bridge loan to facilitate the purchase.

 

In this case, the original property becomes the collateral for the loan. Once long-term financing is available, it is used to pay back the bridge loan and also meet other capitalization needs. Bridge loans are mainly used in real estate to retrieve property from foreclosure or to close on a property quickly.

 

Types of Bridge Loans

There are four types of bridge loans, namely: open bridging loan, closed bridging loan, first charge bridging loan, and second charge bridging loan.

 

1. Closed Bridging Loan

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A closed bridging loan is available for a predetermined time frame that has already been agreed on by both parties. It is more likely to be accepted by lenders because it gives them a greater degree of certainty about the loan repayment. It attracts lower interest rates than an open bridging loan.

 

2. Open Bridging Loan

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The repayment method for an open bridge loan is undetermined at the initial inquiry, and there is no fixed payoff date. In a bid to ensure the security of their funds, most bridging companies deduct the loan interest from the loan advance.

 

An open bridging loan is preferred by borrowers who are uncertain about when their expected finance will be available. Due to the uncertainty on loan repayment, lenders charge a higher interest rate for this type of bridging loan.

 

3. First Charge Bridging Loan

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A first charge bridging loan gives the lender a first charge over the property. If there is a default, the first charge bridge loan lender will receive its money first before other lenders. The loan attracts lower interest rates than the second charge bridging loans due to the low level of underwriting risk.

 

4. Second Charge Bridging Loan

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For a second charge bridging loan, the lender takes the second charge after the existing first charge lender. These loans are only for a small period, typically less than 12 months. They carry a higher risk of default and, therefore, attract a higher interest rate.

 

A second charge loan lender will only start recouping payment from the client after all liabilities accrued to the first charge bridging loan lender have been paid. However, the bridging lender for a second charge loan has the same repossession rights as the first charge lender.

 

How Do They Work?

 

A bridge loan is used in the real estate industry to make a down payment for a new home. As a homeowner looking to buy a new house, you have two options.

 

 

 

The first option is to include a contingency in the contract for the house you intend to buy. The contingency would state that you will only buy the house after the sale of your old house is complete. However, some sellers might reject this option if other ready buyers are willing to purchase the house instantly.

 

 

 

The second option is to get a loan to pay a down payment for the house before the sale of the first house goes through. You can take a bridge loan and use your old house as collateral for the loan.

 

 

 

The proceeds can then be used to pay a down payment for the new house and cover the costs of the loan. In most cases, the lender will offer a bridge loan worth approximately 80% of the combined value of both houses.

 

 

 

Business owners and companies can also take bridge loans to finance working capital and cover expenses as they await long-term financing. They can use the bridge loan to cover expenses such as utility bills, payroll, rent, and inventory costs.

 

 

 

Distressed businesses can also take up bridge loans to ensure the smooth running of the business, while they search for a large investor or acquirer. The lender can then take an equity position in the company to protect its interests in the company.

 

 

 

Pros of Bridge Loans

 

One of the advantages of bridge loans is that it allows you to secure opportunities that you would otherwise miss. A homeowner looking to buy a new house may put a contingency in the contract stating that he/she will only buy the house after selling their old house.

 

 

 

However, some sellers may not be comfortable with such an agreement and might end up selling the property to other ready buyers. With a bridge loan, you can pay a down payment for the house as you wait for the sale of the other house to finalize.

 

 

 

Also, qualifying and getting approved for a bridge loan takes less time than a traditional loan. The speedy processing of a bridge loan gives you the convenience of buying a new home while waiting for the best offer for the old house.

 

 

 

The long waiting time for traditional loans may force you to rent an apartment, and this may affect your budget. Also, bridge loans allow for flexible payment terms depending on the loan agreements. You can choose to start paying off the loan before or after securing long-term financing or selling the old property.

 

 

 

Drawbacks of Bridge Loans

 

Taking a bridge loan will leave you with the burden of paying two mortgages and a bridge loan while you wait for the sale of your old house to go through or for long-term financing to close.

 

 

 

If you default on your loan obligations, the bridge loan lender could foreclose on the house and leave you in even more financial distress than you were prior to taking the bridge loan. Plus, the foreclosure might leave you with no home.

 

 

 

As a short-term form of financing, bridge loans are costly, due to the high interest rates and associated fees like valuation payments, front-end charges, and lender legal fees. Also, some lenders insist that you must take a mortgage with them, limiting your ability to compare mortgage rates across different firms.

 

 

 

Applications in Financial Modeling

 

In financial modeling, it may be necessary to build in the functionality for the model to have a bridge loan that kicks in if the company runs out of cash.

 

 

 

In many types of financial models, there will be a revolver built it, but a more substantial piece of short-term debt may be required if the company looks like it will have a negative cash balance. In this case, the analyst will add a short-term debt tranche to the debt schedule as well as on the balance sheet under short-term debt.

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LOAN TYPES: Purchase, Rate and Term Refinance, Cash-Out Refinance

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PROPERTY TYPES: Residential, Multi-family, Mixed-Use

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LOAN AMOUNTS: $75,000 TO $10,000,000

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LOAN-TO-PURCHASE PRICE: Up to 80%

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LOAN-TO-VALUE FOR REFINANCE: Up to 70%

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MINIMUM FICO SCORE: 680 (lower scores accepted on an exception basis)

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TERM LENGTH: 12 TO 24 months

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No prepayment penalty

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​​​​​​​​SIMPLY REQUEST A BRIDGE

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LOAN APPLICATION!

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