What is Bridge Financing?
Bridge financing is a short term loan that helps individuals finance a period of time when they need additional money. In essence, bridge financing “bridges” the gap between time periods. Bridge financing is popular because it allows borrowers to act and receive funds in a short period of time.
Let’s suppose you purchase a new home, but your old home is still on the market and has yet to sell. In this case, a bridge mortgage would give you the extra cash needed to help cover both mortgages until your original home sells. This type of bridge financing can have more fees and higher interest rates than home equity loans and other short term loans; however, it is helpful for individuals who cannot hold off on buying a new home before selling an existing one.
Flipping a Home with Bridge Financing
For investors who want to quickly buy, renovate, and sell a home (a.k.a. flipping), bridge financing is a great option. Since a bridge mortgage is usually a short term loan with no prepayment penalty, it allows individuals to quickly purchase, repair, and sell a home to see an immediate ROI. Similarly, investors can request bridge financing for a commercial property (e.g. apartment building), allowing them to purchase an empty apartment building, renovate it, find tenants, and then sell the property to see an instant profit.
Commercial Bridge Financing
Similarly, business people often seek bridge financing to finance a period of time when they need to complete a particular task, such as renovating, selling, renting out, or receiving more financial assistance a property. Bridge financing allows commercial property owners to help fund the purchase and quickly close on the property.
A Bridge to Longer, Cheaper Financing
Another way that businesspeople use bridge financing is to acquire a large property (e.g. retail space), and then open and operate a business long enough to qualify for long-term financing.
For example, let’s suppose that a borrower wishes to purchase a hotel. The borrower is approved for a traditional commercial loan, but he or she must show at least two successful years of business operation. The borrower funds the hotel purchase by having the seller carry back 30% of the purchase price. The borrower then receives a commercial bridge loan for the remaining 70%. Now, the borrower has enough money to set up their business, operate it for a couple of years, prove to lenders that it is a successful business venture, and then receive longer-term, lower-interest financing.
Renovating a Commercial Property
Like with home renovations, bridge financing can also be used for commercial property renovations. Businesspeople often use commercial bridge loans for financing renovations because they offer short terms and fast cash. You may also want to receive bridge financing to pay off the existing mortgage. For example, if you recently purchased an apartment complex, you could apply for a $400,000 bridge loan and use $300,000 of it to pay off the existing mortgage, and then use the other $100,000 for renovations.