Simply put, there will be times throughout the course of owning a business where funds are tight. In some cases, a bridge loan may be one of the most beneficial methods for securing cash quickly. At GSAGE Capital, we like to think of our $250,000+ bridge loans as a means to support your company’s business growth.
Detailed below we discuss what a bridge loan is, how it differs from a hard money loan and in which circumstances you may choose to consider utilizing these sources of financing.
What is a bridge loan?
Investopedia defines a bridge loan as “a short-term loan used until a person or company secures permanent financing or pays an existing obligation.” When timely expenditures, such as real estate opportunities or short term expenses, occur quick funds are made available to qualified borrowers. These funds are supplied with the intent of paying the loan off promptly, or refinancing.
A business bridge loan, otherwise referred to as a commercial bridge loan, works similarly to a real estate bridge loan, however the capital Is used for pressing operating expenses, such as marketing, inventory or payroll. Businesses often seek out a bridge loan during a period of time in which they are awaiting long-term funding. This type of loan offers immediate cash flow fast, often while waiting on another form of financing. Aptly referenced, you may also hear a bridge loan being referred to as a “gap” or “interim” loan.
Commercial bridge loans are a short term solution that require prompt re-payment. It is common for bridge loans to have higher interest rates, as well as the possibility of coming with additional up-front fees. A business bridge loan is often secured to cover general operating expenses while long-term financing is being pursued. Commercial bridge loans may also be utilized to obtain property quickly, secure temporary business resources or to take advantage of limited time inventory offers. Borrowers include real estate specialists, investors and business owners who have a need for time sensitive capital that is necessary to turn profit.
In order to qualify for a commercial bridge loan, you must have equity of at least 25% with low debt to income ratio and good credit. In the event you qualify with more than one lender, you’ll need to compare the terms and conditions of each. Some require immediate repayment, while others provide monthly payment options.
Depending on the amount of the bridge loan, the borrowers credit worthiness and other factors will be considered. Closing costs and additional administrative, origination and legal fees may apply. Every lender is unique and will offer varying lending programs involving various terms and conditions. Be aware that speed of funding, interest rates, loan terms, repayment methods and prepay incentives will differ from each lender.
What is a hard money loan?
An alternative financing option that supplies funds quickly is a hard money loan. Unlike a bridge loan, a hard money loan is typically used for real estate transactions and is secured by real property. This loan is based on collateral instead of credit or financial position. In general, a hard money loan is more difficult to acquire, as it can only be obtained through companies or investors, not banking institutions.
With property being used as collateral, this financing is riskier for lenders, thus commanding higher interest rates for borrowers. However, with collateral being the primary focus, payment is not emphasized as much as a bridge loan that is determined by the applicant’s financial standing.
Individuals may seek a hard money loan when they need cash fast to fund a property purchase or similar project. Investors who purchase and “flip” homes will often turn to a hard money loan for an upcoming project, using the property they intend to purchase as collateral.
When should you use one over the other?
It is important to determine if a bridge loan or hard money loan is the most ideal fit for your situation. By weighing the advantages and disadvantages of each option, you may gain a clearer perspective.
Bridge Loans Pros and Cons-
-Cash is available immediately to borrowers, within as little as 5 days, once approved.
-The application process is faster than that of a traditional loan.
-The funds can be spent in a variety of ways, in order to turn a profit.
-The repayment period is relatively short. Depending on the lender and terms, it could span from several weeks to 12 months.
-The interest rate is high, hovering between 15-24% APR.
-There may be upfront costs, such as origination fees. Prepayment penalties and hidden fees may also need to be considered.
Hard Money Loans Pros and Cons-
-The borrower will have fast access to capital.
-Terms can be negotiated, with flexibility in the repayment schedule.
-The approval process is less rigid than with other forms of financing. Lenders do not take financial standing into consideration, as the focus is placed on equity in a property.
-Lower LTV ratios than traditional loans, between 50-75%.
-The interest rate is high, as this is a riskier, “last resort” type of loan.
-It may be difficult to get approved, as some lenders may not want to assume the risk involved.
How GSAGE Capital can help
Allow us to help propel your business toward financial success. If you need at least $250,000 in capital to expand your business, look no further. In addition to bridge and hard money loans, we offer a variety of financing solutions including SBA loans, franchise financing, unsecured lines of credit, and commercial real estate financing. Apply today to discover which of our financing options is the best fit for you.