A commercial bridge loan, also known as a business bridge loan, can offer cash flow in the short-term if you have costs to cover before other financing comes through. In other words, commercial bridge loans can save a business in a pinch, especially when it comes to purchasing real estate.
Keep reading to learn more about what a commercial bridge loan is, how they’re typically used, their pros and cons, and more.
Key Points
• Commercial bridge loans provide temporary funding for businesses to cover gaps in financing, typically lasting 6 months to 3 years until long-term financing is secured.
• These loans are often used for property purchases, renovations, business expansions, or debt restructuring while waiting for permanent financing.
• Due to their short-term nature and higher risk, commercial bridge loans usually have higher interest rates than traditional loans.
• Lenders prioritize property value, business assets, and projected future income over credit scores when approving bridge loans, making them accessible for businesses with less-than-perfect credit.
• Alternative to commercial bridge loans include small business loans and lines of credit, small business grants, SBA loans, and invoice factoring.
What Is a Commercial Bridge Loan?
A commercial bridge loan is a short-term financing solution used by businesses to cover immediate funding needs while waiting for long-term financing or a property sale. These loans are commonly used for real estate purchases, renovations, business expansions, or debt refinancing.
Because of their purpose, bridge loans have shorter terms than traditional small business loans, typically up to three years. These loans are usually secured, meaning they’re backed by collateral of some type, such as inventory or real estate. Bridge loans also generally have higher interest rates compared to traditional loans.
How Do They Work?
Let’s say a business wants to purchase a vacant office building for $5 million to expand its operations. However, securing a traditional commercial mortgage would take several months, and the seller requires a quick closing.
As a solution, the business obtains a commercial bridge loan for $3.5 million, using the property as collateral. The loan has a 12-month term, 9% interest rate, and interest-only payments. During this period, the business owner refinances the property into a long-term commercial mortgage with a lower interest rate, and pays off the bridge loan.
Just like with any other type of business loan, different lenders will have different lending programs. When comparing commercial bridge loans, two aspects to consider include:
• Speed of funding: Businesses typically seek commercial business loans because they have an urgent funding need. Check a variety of lenders to find one that can meet your timeline.
• Incentives to prepay: This is a short-term form of funding — in other words, a temporary loan. Ask lenders if you can receive a prepayment discount or otherwise save money by paying it off even earlier.
Also, ask each lender if they offer open or closed bridge loans. Open bridge loans don’t have hard and fast repayment dates, offering more flexibility. These may come with higher interest rates and make it more difficult to get approved, though. Closed loans, on the other hand, have a set payoff date and, in return, can be easier to obtain with lower interest rates.
Types of Bridge Loans
There are several types of commercial bridge loans, each designed to meet different business needs:
1. Real estate bridge loans: Used by investors or developers to quickly acquire, renovate, or reposition commercial properties before securing long-term financing.
2. Business expansion bridge loans: Provides short-term funding for companies looking to expand operations, acquire new locations, or invest in growth opportunities.
3. Debt refinancing bridge loans: Helps businesses refinance existing debt or consolidate loans while they arrange more permanent financing solutions.
4. Construction bridge loans: Used to fund the initial phases of commercial construction projects before developers secure full construction or permanent financing.
5. Acquisition bridge loans: Assists businesses in purchasing competitors, assets, or inventory when immediate funding is needed but long-term financing is not yet available.
Commercial Bridge Loans vs. Traditional Loans?
People typically take out a bridge loan because they need fast access to cash for a short period of time. Traditional loans usually have a longer approval process and almost always have a longer term.
Sometimes, repayment of a bridge loan resembles that of traditional loans, with a monthly payment required. Other times, the borrower would make interest-only payments until the end of the loan term, and then make one final payment to pay the loan off. And in other cases, the interest owed is taken from the loan amount at the time of closing.
As mentioned above, bridge loans also tend to be more expensive than traditional loans. Not only do they usually have higher interest rates, but bridge loans also tend to have hefty origination fees.
Recommended: What Are the Fees Associated with Business Loans?
Pros and Cons of Commercial Bridge Loans
Now, take a look at the benefits and downsides of commercial bridge loans.
Pros
• Businesses can get cash fast for immediate needs, typically real estate.
• To facilitate the fast need for funds, the application, underwriting, and funding processes are typically streamlined.
• Can be used to cover day-to-day expenses while a transaction is in progress.
Cons
• Interest rates are higher than many other loan types.
• This is a secured loan with property serving as collateral.
• They often have high origination fees.
Recommended: A Guide to Collateral and Business Loans
How Businesses Use Commercial Bridge Loans
Although commercial bridge lending is often used when purchasing real estate, there are other reasons that a business may look into a bridge loan.
Fix-and-Flip Project
A fix-and-flip project involves purchasing a property, fixing it up or renovating it, and selling it for a profit. This is typically done over the course of a few months. Because bridge loans are short-term financing options, they can be used to purchase and fund these types of projects. Once the home is resold, the money can be used to pay off the loan.
Delay in Customer Payment
If a business offers services to other businesses (meaning it’s a B2B company), they invoice their customers for payment. The company would then use the money paid on these invoices to cover payroll, rent, utilities, and other expenses. If customers don’t pay on time, they still need to pay their own bills — and so they could use this type of loan to bridge their cash flow issues.
Expanding Your Business
A small manufacturing firm, for example, may have an opportunity to expand their services but need to buy new equipment to do so. Perhaps they’ll go to an auction to get the best pricing, which means they’d need to have funds without knowing exactly what they’ll purchase. This would make it challenging to obtain equipment financing ahead of time. Bridge lending can offer a solution in this scenario.
Insurance Claims
When a business leverages bridge lending, they can use the money in ways they see fit. So, if there’s some sort of disaster (a fire, flood, or tornado, for example), then a business could use the funding to take care of immediate expenses while waiting for business insurance claims to be processed.
Buying Inventory
Sometimes, businesses use bridge lending services when they need to buy inventory to sell. For instance, they may need to restock their shelves after sales increased or get ready for the holiday season. The business could then pay off the loan through sales proceeds or by refinancing to another type of business loan.
Recommended: How to Refinance a Business Loan
Where to Apply for a Commercial Bridge Loan
You can get a commercial bridge loan through a bank, credit union, private lender, or online lender.
Banks and credit unions may offer lower rates than direct and online lenders, but it may take longer to get approved and the requirements may be more stringent. Direct lenders typically have less strict requirements. Also, they may offer interest-only payments for the first year or two until the final payment is due.
To find the best commercial bridge loan, you’ll want to shop around to find the best rate and terms for your situation.
Recommended: Comparing Personal Loans vs. Business Loans
Alternatives to Commercial Bridge Loans
If a commercial bridge loan is not right for you, there are other options to secure small business financing, including:
• Small business loan: Traditional small business loans can be short or long-term, be backed with collateral or have no collateral, and can come with competitive interest rates for those with good credit scores.
• Business line of credit: A business line of credit gives a business access to funding where interest is charged on the outstanding balance, not on the amount that’s available to use. Businesses can use the funds as needed and repay them in a revolving manner, as long as they don’t exceed the approved limit for the line of credit.
• SBA loans: SBA loans are guaranteed by the U.S. Small Business Administration (SBA) and offered by certain lenders. Loans are available up to $5 million to cover a wide range of business needs.
• Invoice factoring: With invoice factoring, businesses can use their unpaid customer invoices as collateral. This helps B2B companies to manage their cash flow with the factoring company, which is then responsible for collecting the outstanding amount.
• Small business grants: Small business grants are lump sums awarded by federal, state, or local governments or by private corporations that do not need to be repaid.
The Takeaway
Commercial bridge lending can provide businesses with a fast influx of cash on a short-term basis. Business owners can leverage this funding to buy real estate, expand operations, and manage cash flow. There can be cons, though, to bridge loans, such as higher interest rates and shorter repayment terms.
If this type of lending isn’t right for you, there are other types of small business funding to consider, including SBA loans, invoice factoring, and long-term small business loans.
If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.
FAQ
What is a commercial bridge loan?
A commercial bridge loan is used to secure funding while you wait for long-term funding to come through. It’s used to “bridge the gap” between the period of time it would normally take for a normal business loan to close. In most cases, commercial bridge loans are used when purchasing real estate.
What are the cons to a commercial bridge loan?
Cons to a commercial bridge loan include higher interest rates, additional and/or higher fees, and shorter repayment terms.
How is a commercial bridge loan different from a traditional loan?
A commercial bridge loan is a short-term form of funding that allows you to purchase a property while you wait to secure a traditional financing option. Traditional loans typically have longer repayment periods and lower interest rates. These loans do not close as fast as bridge loans, though.
How long do commercial bridge loans typically last?
Commercial bridge loans typically last 6 months to 3 years, depending on the lender and borrower’s needs. Most loans have 12- to 24-month terms, with some offering extensions.
What are the interest rates on commercial bridge loans?
Interest rates on commercial bridge loans typically range from 6% to 12% or higher, depending on factors like loan amount, property value, borrower creditworthiness, and market conditions. Since these loans are short-term and higher-risk, they carry higher rates than traditional financing but offer quick access to capital for businesses.
Photo credit: iStock/alvarez
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