A bridge loan is something that an individual or business obtains to allow them to pursue an investment goal that would be impossible otherwise. For example, a couple purchasing a home might apply for a bridge loan if the closing date occurs before their mortgage lender has had the chance to complete processing of their loan. A new business might obtain this type of loan to help it through the startup phase until it becomes profitable.
What each type of bridge financing has in common is that the applicant receives a temporary loan with the expectation of receiving a larger loan with longer repayment terms soon. We provide brief explanations for some of the most common types of stop-gap loans below.
Debt Bridge Loan
Also known as bridge loans, this type is popular in commercial real estate. They operate in a similar fashion as a consumer mortgage loan with a slightly different type of structure. The interest rate is typically three to four percent higher than loans offered with the standard London Interbank Offered Rate (LIBOR). Most lenders offer this loan for a maximum of six months but may be willing to extend it for an additional fee.
Equity Bridge Financing
This loan is ideal for investors hoping to avoid debt by taking on a high-interest, short-term loan. It’s available exclusively through venture capital financing companies. Rather than charge interest, the venture capital company receives a percentage of the company’s value. Offering a 10 percent value for the promise of six months’ worth of financing is a common scenario.
Hard Money Loans and Opportunity Funds
An opportunity fund is a variation of a bridge loan for investors who intend to follow through with a complex purchase. The funds to finance this loan come from a variety of sources including private equity, endowment funds, pension plans, and several investors. With a hard money loan, lenders base their decision on the property’s collateral value rather than the applicant’s credit rating.
When you’re ready to learn more about your loan options, we invite you to schedule an appointment with Norus Capital.