The Basics of Bridge Loan Financing
It’s no secret that traditional term loans take a while for approval. Even Small Business Administration loans may require several weeks or months to complete successfully. What can homeowners and business owners do if they can’t wait that long to get the required capital? One solution is bridge loans.
What Are Bridge Loans?
As the name implies, this type of loan is designed to bridge the gap between short-term and long-term financing. They give you the capital you need while you complete an application for a traditional term loan. This type of financing is valuable for people and businesses who need fast access to money for large purchases.
In exchange for this accelerated approval process, you usually have to pay higher interest rates than with long-term loans. Instead of having 10-years to make payments, bridge financing has a repayment structure of six months.
What Are the Advantages of a Bridge Loan?
There are several reasons a bridge loan can be a great option for you:
- Faster approval: In many cases, you can get approved for bridge loan financing in about one week. This is much less than the three weeks or multiple months of other loans.
- Flexibility for purchases: If you find an amazing deal on a big-ticket item, this type of financing can help you buy right away. Business lines of credit usually don’t offer credit limits that high.
- Capital at the right time: Real estate in hot investment areas can sell quickly. If your company doesn’t have enough savings to cover a 10% or 20% down payment for a building, a bridge loan can help you.
Homeowners often use a bridge loan to help with financing for buying a new house. That way they have money for the purchase while they wait for their original home to sell.
What Types of Bridge Loan Financing Is Available?
There are a few types of bridge financing that may fit your needs perfectly:
- Traditional bridge loans: The application process for these loans is nearly identical to term loans, so you’ll need excellent credit. They trade faster approval for higher interest rates.
- Venture capital: Venture firms advance you large amounts of capital in exchange for a stake in your company. They get a portion of ownership in return for financing.
- Hard money loans: These loans use real estate or equipment as collateral, so your credit score is less important. They typically have higher interest rates.
There are also special types of financing offered by private lenders and some banks called opportunity funds. In all cases, bridge loans help you make vital purchases in emergencies. Switch over to traditional financing when possible to enjoy the best terms.