| Bridge Loans are a short-term financing option and | | | | commercial property that has a great location but is |
| are used while waiting for permanent financing, or the | | | | in disrepair. A Hard Money Lender can provide a |
| next stage of financing to be obtained. Bridge loans | | | | bridge loan until the rehab of the property is |
| provide funding to "bridge" the gap between a | | | | complete and conventional long term financing can be |
| company's current needs and their long term | | | | obtained. |
| financing requirements. | | | | 3. A contractor needs funds to get through the |
| One of the characteristics of a bridge loan is that | | | | permitting process of a project. Conventional |
| they can close quickly, which in turn allows a | | | | financing isn't available at this stage because there is |
| company to capitalize on a timely business | | | | still too much risk. A bridge loan provides the needed |
| opportunity, or acquisition. The quick access to | | | | funds and allows the contractor to move into the |
| money can also allow a business the chance to avoid | | | | construction phase and then qualify for other forms |
| penalties, bankruptcy, or other temporary problems. | | | | of financing. |
| If longer term issues need to be dealt with, this | | | | 4. During a partner buyout a bridge loan can help |
| transitionary financing provides the company time | | | | ensure the cash flow and uninterrupted operation of |
| until longer term financing can be secured. | | | | the business until traditional funding takes place. |
| Another characteristic of bridge loans is that the | | | | 5. Property, or equipment bought at auction may |
| process usually requires less documentation than | | | | have a narrow window for closing the deal and timing |
| conventional financing. Bridge loan lenders don't usually | | | | of traditional financing would keep the buyer from |
| have the same government regulations to adhere to, | | | | proceeding with the opportunity. |
| so they tend to have more flexibility in their lending | | | | 6. To meet the underwriting expense of going public, |
| criteria and the documentation they require. | | | | short term financing of a bridge loan allows the |
| However, less documentation does not mean they | | | | company to proceed with their IPO plans. |
| won't perform due diligence to have a comfort level | | | | The types of deals that require this type of loan |
| with the transaction before they fund. | | | | may be considered speculative in nature, or have |
| Permanent financing is generally used to "take out," | | | | higher risk factors. Due to this many banks do not |
| or pay back, the bridge loan. In the event the funds | | | | offer these loans. Banks must meet government |
| were used to buy real estate, the property may be | | | | regulations and need to justify their lending practices. |
| rehabbed and sold to pay off the loan. | | | | Riskier loans do not usually fall within the lending |
| Uses of Bridge Loans | | | | parameters of many banks. A majority of the these |
| Acquisitions | | | | loans will come from private investment firms and |
| Avoid penalties | | | | hard money lenders. |
| Balloon Note Due | | | | When there are business opportunities, quick |
| Bankruptcy Resolutions | | | | deadlines, an old loan maturing before a new loan can |
| Business Expansion | | | | be put in place, funding needs during the permit, |
| Foreclosure Avoidance | | | | planning, or evaluating stages, etc., these loans can |
| Investment opportunities | | | | be an essential financial tool. |
| Mergers | | | | Tips: |
| Payoff Tax Liens/Judgments | | | | 1. These loans are quick to obtain, but quick to |
| Refinancing | | | | expire. |
| Partner Buyouts | | | | 2. They are similar to a hard money loan and the |
| Renovations | | | | terms are often used interchangeably in |
| Sale-Leaseback | | | | conversations. Both are short-term, higher interest |
| Examples of using Bridge Loans: | | | | rate, non-standard loans, but in some circles hard |
| 1. An existing manufacturer needs $1 million to | | | | money refers to the lending source and a bridge loan |
| expand their business. They have 3 new equity | | | | refers to the duration of the loan. |
| investors who will be investing in the firm over the | | | | 3. These loans usually come with higher interest rates |
| next 6 months, but at different intervals. However, | | | | than traditional financing a larger down payment, |
| the business has orders and needs to expand their | | | | meaning a lower Loan to Value (LTV) and a lower |
| facility and production line sooner than 6 months. The | | | | level of risk and provides an opportunity for lower |
| quick closing bridge loan allows the company access | | | | interest rates. Lower LTV's represent a lower level |
| to the needed funds so they can complete their | | | | of risk and may allow lower interest rates. |
| expansion and profit from the new orders. Money | | | | 4. With the shorter time period, these borrowers will |
| from the 3 new equity investors will pay off the | | | | need to be aware that fees for valuations, legal, |
| bridge loan. | | | | dues diligence, etc., will be amortized over a shorter |
| 2. A business has an opportunity to quickly acquire a | | | | period than traditional financing transactions. |