Commercial Bridge Loan: How To Evaluate Risks vs. Benefits

Any form of financing is going to have some advantages and drawbacks to using it. Commercial bridge loans—like any other loan--have both.

In a perfect world, there are many things that business owners would never have to worry over. They would never have cash flow issues. They wouldn’t have to wait for their long-term financing to come through. If they needed to make any repairs or changed before they could get approved for a long-term loan, they would be inexpensive and easy to fix.

The list could go on and on, but the sad reality is that business owners often find themselves in need of cash for one reason or another before they can receive approval for their primary loan. A commercial bridge loan can help them bridge the time gap till the long-term loan is approved.

However, just like anything else in finance, a commercial bridge loan comes with drawbacks as well as benefits. It is important to know what they are ahead of time.

Benefits To Applying For A Commercial Bridge Loan

Of course, the biggest benefit is that your business gets a much-needed cash infusion, but there are other benefits to getting it through a commercial bridge loan. 

One of the more significant benefits is the very nature of the loan--it's short term. Short term means you have less time to pay off a loan and can only break the payments down so much, but it also means you pay less interest. With longer term loans there will be more of a chance you and your business fall on some hard times. If you struggle to recover and miss a few payments (or default) getting another loan in the future could be harder.

To keep repayment from being an issue, commercial bridge loans are often structured to be paid back when your long-term loan comes through. Making your payments will, of course, improve your credit rating which will make it easier for you to get your next loan.

Drawbacks Associated With Commercial Bridge Loans

One of the biggest drawback to commercial bridge loans is the most obvious. Since it is a short-term loan, the payments will be larger. Larger payments are more challenging to make, and since the term is shorter, lenders are often less likely to be flexible with payment arrangements. Instead, they will probably be more likely to tack on late fees and penalties making it even harder to make your payments.

Of course, you can get around payment issues by structuring the loan so you can pay it off after you receive our long term one. However, the longer you take to pay it off, the more interest accrues. Depending on the size of the loan, the interest can be significant.

The biggest potential drawback is the purpose of the loan itself. It is meant as a short term solution to help you cover expenses as you wait for your long-term loan to be approved. What if it gets turned down? What if, like many people were faced with during the housing crisis, the institution you are trying to get your long term loan through fails?

You still have to make your payments on time. Should you struggle with doing so, your credit rating may be adversely affected which will make it harder to get approved the next time you apply.

Dennis Dahlberg Broker/RI/CEO/MLO

Level 4 Funding LLC
Arizona Tel:  (623) 582-4444 
Texas Tel:      (512) 516-1177 
Dennis@level4funding.com
www.Level4Funding.com

NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027

111 Congress Ave |Austin | Texas | 78701    

   

About the author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true.

Dennis has been married to his wonderful wife for 42 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.