Obtaining financing for a commercial property can be made through conventional lenders, but sometimes bridging loans are needed to make the transaction happen. They allow you to pursue opportunities that are seen as too risky for traditional sources. These are especially popular when the purchase is needed quickly but the existing one is still on the market waiting to be sold. If you're not sure you will get approved, then a bridging loan may be just what you need.
When does it make sense to apply for bridging finance? It will depend upon each situation, but below are some advantages, as well as disadvantages to help you decide if you should consider it:
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Advantages
• Flexibility
• Fast closing
• No credit issues
The biggest reason typically used for these loans in a commercial setting is because of its ability to have a fast closing. When an individual or company is looking to secure profitable opportunities, it is important to have sources to be able to close the deal within a week and not having to wait 30 days as traditional does. Closing quickly and as soon as possible is very appealing to a seller, giving you a better chance to secure the deal.
Disadvantages
• Risky
• High interest rates and points
• Short terms
• Lower loan to value ratio
Bridging Finance versus Conventional
There are certainly reasons where it makes sense to use alternative financing. Conventional can offer lower interest and longer terms, but here are a few of reasons why you would choose a bridging loan:
• Personal credit score problems
• The properties have problems (i.e. low occupancy rate, high cost for repairs, etc)
• Fast closing is needed in days rather than waiting for weeks
Items needed for qualifying
When you are looking to qualify, the lender will be looking at a few things when considering you r deal. It's important to especially have a solid exit as that's how a lender will know their investment will be repaid and give them reassurance they're making the right decision in providing you with the funds. These items are listed below:
• Approximate value (not purchase price)
• Location
• Exit strategy
• Collateral (typically real estate)
Examples of exit strategies
One item that lenders will be interested in and expect will be that you have a clearly defined exit strategy on how you plan to repay. These will differ from situation to situation, but here a few scenarios that a bridging loan will be ideal for:
• Waiting for a buyer to qualify
• Moving to a conventional and waiting for approval
• Closing is near completion and will finalize shortly in the future
Bridging finance is a great way to make a profitable transaction close, if your other options won't take it. Commercial properties are a perfect place to go this route. There are usually lower loan to value ratios as this is what protects lenders. So if you are looking to close quickly on a deal, need flexible options, and want a source that will provide the needed cash, then this may be your answer.
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