Does Your Company Need a Commercial Bridge Loan?
Projecting a company’s cash flow can seem easy on paper. However, there are so many x-factors that can make the numbers fall off-forecast very quickly. If you owe a balloon payment during a fallow period, or even if there’s an opportunity to grow your business during this time, it may be hard to make ends meet or nurture your company’s growth.
Bridge and hard money loans can help commercial real estate companies during these times. These type of loans offer short-term lending terms that often use assets as collateral to support businesses who may be in a period of transition.
A typical example of this is a commercial real estate company who owns a property with low occupancy rates – i.e., the number of units rented divided by the total number of units in the building. In doing your research, they find that minimal investment can increase the value of the property, thus increasing the occupancy rate. With increased demand and value, when current tenants’ leases are up, they may be able to raise rent slightly, bringing in even more revenue.
However, if the building is low-occupancy, you may not be bringing in enough money to cover the cost of upgrades and repairs. Here’s when bridge and hard money loans come into play. With the proceeds of that loan, they’ll be able to upgrade unrented units and improve infrastructure. As unrented units become rented, and as current tenants re-up their lease at a higher month-to-month rent, they’ll be able to pay back the loan quickly and efficiently.
Now, while there are many benefits to this type of loan, the risks should not be ignored, either. As these loans typically use the purchased assets as collateral, it’s vital that your revenue projections are accurate, that you’re honest with yourself as to how much improvements will cost, and the potential windfall exact and error-free.
Due to their short-term nature, and because they are not based on a loanee’s creditworthiness but the value of the property, these loans also tend to have higher interest rates than typical loans. Meaning, if you’re projections are off – either concerning cost or possible revenue – you may be paying back this loan multiple times as interest begins to collect.
Bridge and hard money loans are not for everyone. However, if you’ve done your homework and all that’s holding you back from increasing the value of your commercial assets is a short-term loan, the risk may be well worth the reward.