More specifically, you need to be able to satisfy the lenders 1) security requirements, 2) debt servicing requirements, and 3) loan repayment requirements.
There can certainly be many other loan requirements for any particular deal, but regardless of the deal these three items are going to need to be covered off.
Let’s look at each one in more detail.
A bridge loan secured by real estate is essentially an equity based loan where the lender is primarily concerned about the market value of the property and the amount of equity that will exist once the requested financing amount is advanced.
Bridge financing on residential properties can be as high as 90% loan to value provided that the resale market for the property is strong enough for fast resale and provide for accurate sale value estimates.
Bridge loans on commercial property tend to fall in the 50% to 75% loan to value range. Once again, the higher the marketability and value predictability of any given property, the higher the potential loan to value that can be extended by a lender.
The second aspect of loan to value is security position.
Some bridge lenders will only consider a first mortgage position while others may consider a second or even third or fourth mortgage position.
Each property and lender can be unique in this regard as well.
During the loan term, the lender will require debt servicing to either cover the cost of interest only, or provide for a principal and interest payment.
The debt servicing will either need to be provided from existing cash flows that are acceptable to the lender, or funds will need to withheld from the loan advance to cover off the debt servicing requirements during part or all of the loan term.
If prepaid interest is required, then the amount of the prepayment will need to be added to the total funds required when determining the loan amount and if the loan amount will then meet the loan to value assessment by the lender for a particular deal.
The last key ingredient to a bridge financing request is the proposed exit strategy to repay the loan either at the end of the term or during the term.
The best exit strategies are one’s where a specific event or transaction will take place that will create proceeds payable directly to the lender.
This is common on real estate purchasing and refinancing transactions and on business contracts and purchase order transactions.
Basically, the more certain or likely the exit strategy is, the more potential for it to be accepted by the bridge lender.
If there is not a strong exit strategy offered up by the borrower, then the lender has to be very confident that in the worst case scenario, the property has the equity and marketability to allow repayment of the debt through other means be that sale or refinance as examples.
When all three of these requirements are well addressed, then a bridge financing arrangement is more likely to be consummated between borrower and lender.
And if all the supporting information and documentation for each of these requirements is readily available, a bridge loan can be approved and funded in very short time period.
If you’re looking to secure bridge financing, offering real estate as the primary loan security, then I suggest that you give me a call so we can quickly go through your requirements and discuss different potential options available to you.
While there are a lot of different scenarios, the basic premise is the same…there is an unplanned or unexpected shortfall in your cash flow projections and you need to fill the gap quickly.
Different types of short falls tend to attract certain types of solutions.
For instance, if you’re business needs additional funds to cover the cost of placing a large purchase order, you would likely first consider purchase order financing. Or if you had an existing line of credit with a bank, you may ask them to increase your limit for the time period required to complete the order.
Another example is when someone is in the middle of a construction project and has an unplanned cost overrun or change in scope that will push the budget beyond the cash available to pay the bills. Once again, this may be covered off by a line of credit or a term loan where the financing is already in place or needs to be applied for.
But when financing is not in place already, or the time and cost required to get the additional capital approved and funded does not mesh with the timing of your cash flow projection, then another alternative would be to get a private mortgage on real estate property you own and which contains equity to borrow against.
Especially for small and medium sized businesses, the ability to access the equity in their homes can be an essential element to managing swings in cash flow requirements.
As a result, many business owners have home equity lines of credit that they can draw upon on demand and then lend the money to their business, moving cash back and forth as required through their own business bridge loan.
But the rules have changed on home equity lines of credit in terms of the amount of financing you can get out of a property. And if you don’t have one arranged, it can take 2 or 3 weeks to complete the application and funding process.
So an alternative source of short term debt financing is private lending which can potentially be done in first, second, or even third mortgage position with financing as high as 90% loan to value in some situations.
The key to private mortgages is the speed in which they can be put into place and in many cases repayment is fully open, so if the short term cash flow need is only a matter of months, you can potentially repay early without any penalty as well.
Compared to almost any other source of financing you can apply for to fill a cash flow gap, a private mortgage is going to be the fastest to get in place if you have all your documentation in order.
Another great aspect of private money is that it can many times go behind your existing financing charges on a property allowing you to retain lower rate loans already in place versus having to pay them out to further access your equity.
If you have a short term debt financing requirement and have equity available to leverage in a residential or commercial property, then I suggest that you give me a call so we can quickly go over your requirements and immediately discuss the available private mortgage options.
This can be for such things as needing to cover off unexpected expenditures or ramping up for a newly landed sales order.
But even in situations where the cash flow requirement is planned, it can be difficult to get a cost effective solution in place in the time you have to work with.
This is why private money bridge loans secured by real estate are such an excellent source of short term capital.
Bridge financing in the form of a first or second or even third mortgage can be put into place quickly against the equity in a residential or commercial property.
While this equity may be accessible through a bank or institutional loan, many times these cannot be arranged in time, or the qualifications end up pushing these slightly outside of the reach of a business owner.
Outside of real estate financing, bridging can be done on different forms of assets such as accounts receivable, inventory, purchase orders, equipment, and other forms of tangible assets.
But the process for other forms of short term asset backed financing can be considerably longer to get into place as well as more costly.
Typical factoring rates range from 18% to 24% per annum.
Refinancing of equipment starts at 12% and tends to provide lower loan to value ratios due to the higher risk associated with used equipment.
This brings us back to private mortgage lending as a great way to fill your cash flow gap provided you have equity in real estate to draw from.
And just because your in business does not mean that the real estate needs to be a commercial property.
The reality is that residential properties on average are easier to secure bridge loans on due to the lower amount of due diligence required to get something in place.
When a residential first or second mortgage is taken out from a private lender, the funds are typically lent to the business by the business owner or shareholder and the business pays the cost of capital and repays the principal.
Most bridge loan facilities have open to fully open prepayment, so if the need is very short term, the loan can be paid back as quickly as possible, potentially without any prepayment penalties as well, depending on the individual bridge lender.
A private bridge loan is often times overlooked or not considered at all for business cash flow financing because it doesn’t fit into what most people would describe as working capital financing.
But in essence, that is exactly what almost all private mortgages represent with terms of no more than one year in length.
So if you’re in need of short term cash flow injection into your business and you have some equity in real estate to leverage, then a bridge loan backed by property based security not only be an option to you, but your best option as well in terms of cost and speed to get into place.
The challenging part about providing a definition is that while the basic description of a bridge financing arrangement is fairly universal, there can be considerable differences in the rates and terms of different forms of bridge capital ranging from secured to unsecured forms.
A bridge loan is typically a loan that will not be outstanding for more than one year.
It will have a defined beginning and ending time, the application of funds will be clearly understood as well as the specific events or actions that will repay the loan at the required time.
Funding is required to meet a short term capital requirement and resulting debt used to meet this requirement will be paid rather quickly in most cases from a defined source of capital which may be in the form of cash or a longer term debt or equity financing arrangement.
With respect to the bridge financing options we provide, they are all in the form of property financing backed by mortgage security.
This form of bridge capital can be in first, second, or even third mortgage position, depending on the property and the amount of equity that exists to cover off the cash requirement and is typically provided by a private money lender or investor.
Interest rates for a first position bridge loan will tend to fall in the 7% to 12% range, a second in the 10% to 15% range, and thirds will see rates that trend still higher due to the relative risk associated with a higher or deeper subordination position.
The cost of capital will also tend to include lender and broker fees which are usually calculated as a percentage of the loan amount, but can also be stated as a fixed amount. The lender and broker fees are paid at the time of closing from the loan proceeds.
The faster the bridge loan needs to be put into place, the higher the interest rate, lender, and broker fees will likely be as there are a limited number of lenders that can respond to a bridge financing request that needs to be completed in a number of days which is extremely fast for mortgage financing or any form of registered bridge capital for that matter.
And while we say that the loan term will be less than one year, in many cases the time period is significantly less than a year even though the mortgage term may be set at one year.
In situations where we know that the mortgage is unlikely to go to term, there can be several different prepayment options available to the borrower, depending on the lending and funding criteria of any particular lender.
Repayment options can range from fully open with no prepayment penalty to three months interest and many different options in between.
The key to remember with the cost of bridge capital is the comparison with value of the opportunity gained or the cost avoided.
A comparison with say a bank loan will show that a bridge loan as described above is more expensive. But that is also an apples and oranges comparison as banks are not prepared to even entertain many short term bridging requests.
There is a cost of flexibility and speed which most bridge funding facilities provide. And if the cost is less than the value of the benefit, then its certainly something to be considered.
In most cases, short term cash outflow spikes are covered off by lines of credit, credit cards, and equity injections from the business owner or owner.
But there are times when the credit in place is still insufficient to cover off the capital needs of the business and if the capital cannot be supplied in a timely fashion, the business can either lose out on a profit making opportunity, or incur a cost or penalty from money not being advanced when due.
There are different types of asset based lending such as factoring, inventory financing, and purchase order financing that can also be used for short term capital needs, but all of the these are going to take some time to set up and can be quite costly to the business.
One of the better ways to generate the additional capital that you need in a hurry is to take advantage of equity you have in real estate property.
This can be property owned by the business, a related or unrelated company, or even personal property such as a home.
Regardless of the type of real estate, as long as you have equity in it and control with respect to leveraging the property, there is a good chance that a private mortgage can be arranged as a business bridge loan.
While a private lender may want to know what the money is going to be used for, they are more interested in the equity in the property as well as the exit strategy to retire the debt.
So for instance, if a manufacturing or distribution business had the opportunity to manufacture or distribution certain goods via a purchase order, but lacked the working capital to complete the order, this would be an example of a short term capital requirement of the business that could be paid back at a predictable time in the future from a well defined transaction.
Yes, this type of transaction can be financed through different types of asset based lending such as purchase order financing, equipment refinancing, and so on, but none of these other asset based lending solutions are going to be as fast and as cheap as a private first or second mortgage on a property.
Now when I say cheap, we’re not talking about bank prime rates, but compared to other forms of capital available, the cost is likely going to be the lowest available.
And in terms of time, bridge financing provided via mortgage is typically completed in ten business days with the potential for fast closings to occur in two to five business days.
Many times private lending on property is overlooked for this type of transaction, resulting in the business owner utilizing higher cost options instead.
But if you’ve ever accessed incremental capital in this fashion, especially when you were pressed for time, you know that it can be a very fast and cost effective option.
If you are in need of a business bridge loan and have equity in real estate to leverage, I suggest that you give me a call and we’ll quickly assess what private financing options may be available to you.
In many instances we can get a lender proposal back to you in a matter of hours with funding to follow shortly there after.
This is typically a private mortgage due to the fact that most bridge loans need to be put into place quickly and many times a private mortgage lender is the only type of lender that can work within the timelines you have available.
The purpose for property bridge loans primarily will be for property acquisition or some other purpose where capital is required right away.
With respect to property acquisition or purchase, especially when it comes to commercial property, many times the seller will not be prepared to provide the time necessary for you to arrange commercial mortgage financing through a bank so a property bridge loan is required to close the deal and provide you with enough time to get the long term financing you prefer in place.
Without the property bridge loan, you may not be able to close the deal in the time you have to work with and the repayment of the bridge is through the long term financing that will be arranged in the coming months.
So like any bridge loan, there is a defined beginning and end to the transaction, which makes it easier to get financing is place as a private lender can easily assess market value and qualify the borrower’s exit plan for repayment.
While real estate purchases tend to be the main sources for bridge financing, there are many many other situations where bridge loans are arranged where the loan is still secured by a property mortgage.
These other financing requirements can include work being done on the property as well as completely unrelated capital needs.
For instance, its not uncommon for a small business owner to leverage their equity in real estate to provide a short term capital injection into their business to acquire inventory for a sale or provide the capital necessary to complete some sort of transaction.
A real estate mortgage is the common source of financing for the bridge loan due to the ability to get the funding in place in the least amount of time compared to an equipment refinancing, or purchase order financing, or contract financing of some sort where substantial due diligence may need to be performed by the lender before being comfortable with the risk associated with the bridge loan request.
Most property bridge loans through private lenders fall within a capital requirement of $50,000 to $2,000,000 as individual private lenders do not tend go outside of this range.
If you have a property bridge loan requirement, I suggest that you give me a call so we can discuss your situation together and review potential bridge financing options that may be available to you.
A commercial bridge loan is typically a capital requirement that is needed right away because some other source of financing or capital did not materialize as planned, creating a hole in the cash flow.
This can be required for an almost infinite number of situations. The common thread is that money is required for a short period of time and its typically needed in a hurry.
The challenge with arranging a commercial bridge loan is getting a lender comfortable with the security being offered.
Many times there can be a considerable amount of assets offered for security, but determining the security value of an asset as well as the liquidation pathway can take too much time to complete.
This is why most commercial bridge loans have real estate security as all or part of the security backing the loan.
With real estate security against a commercial, industrial, or residential property, or an assortment of properties, the value can typically be determined in short order and in the event of default, the bridge lender has a piece of non moveable security in hand to help recoup their investment.
Too often businesses will invest too much time and energy trying to get their equipment or inventory funded through bridge financing sources only to discover that the process typically cannot be covered off in a short period of time. Especially when you have a large number of items in the cash of equipment and/or inventory, it will take some work to get a third party opinion of value acceptable to a bridge lender, and then there are all the logistics around getting a registration on a clear title of equipment as well as where the security will be located and under whose control.
With real estate, everything can pretty much carry on as usual with a new mortgage registered against the property.
The other advantage commercial or industrial real estate can provide to a bridge loan situation is that the private mortgage lender considering the deal may be willing to work with an appraisal and an environmental assessment with some age on them while most bridge lenders looking at securing other assets will likely want an up to date appraisal.
Turn around time for a commercial bridge loan where real estate is provided as security can be as quick as two weeks and can take 3o to 60 days to complete if other types of assets are pledged as security.
If you need a commercial bridge loan for any of a large number of reasons, and you have some real estate to offer as security against the loan, then I suggest that you give me a call so we can quickly go over your requirements together and discuss different commercial bridge loan financing options that may be available to you.
The bridge loan financing process is required in circumstances where a transaction exists that requires capital and the completion of the transaction will provide the means to repay the bridge loan advance.
There are all sorts of different types of transactions that can require bridge loan financing, but they will all have certain things in common.
First, there will be a concrete beginning and ending point. This can be established by a hard date, or a sequence of events. Typically, the transaction timeline from beginning to end is weeks or months at the the most.
Second, the amount of capital that will be required to complete the transaction is well laid out and clearly is sufficient for the purpose outlined.
Third, there is a source of funds, either in the margin of the transaction, or from another source, that is sufficient to pay the agreed upon cost of financing associated with the bridge loan.
Fourth, the transaction provides something of value that can be leveraged for security such as hard assets, intellectual property, purchase orders, and so on.
Fifth, the transaction will not typically commence unless the bridge loan financing is in place. Once in place, a proof of funds acceptable to the seller may need to be provided by the buyer to confirm that the capital required to complete the transaction is not only secured but will be paid to the seller upon completion of certain requirements.
When real estate is being used as the hard security for a transaction, the transaction can involve the purchase of real estate, or before something completely unrelated to real estate.
This is where private mortgage financing on real estate owned can be such an effective source of bridge loan financing.
A private mortgage lender may want to know what the use of funds from the private mortgage is, but in most cases the actual usage will not dictate whether or not a bridge loan is authorized or not. This provides a property owner holding an equity position with an ideal source of asset based security to support a wide variety of potential transactions that require a short term source of capital.
Private mortgage financing, because of the high quality of security being offered, also tends to be one of the most cost effective forms of bridge loan financing as well.
If you’re in need of capital to fund a transaction and what to better understand your bridge loan financing options, I suggest that you give me a call so we can review your situation together and discuss potential bridge financing solutions that meet your requirements.
In fact, most bridge loans are from private mortgage lenders due to the speed in which they can react to a request for financing, provided that there is equity in real estate that can be leveraged.
Bridge loans are short term financing arrangements that have some form of asset based security in most cases. Assets can range from equipment, inventory, purchase orders, accounts receivable, and real estate.
While other forms of assets can be utilized as security to acquire a bridge loan for a variety of purposes, a private bridge loan against real estate is always going to be preferred if possible for a number of reasons.
First, a private lender can lend up to 85% of fair value of real estate even in a second mortgage security position. The loan to value amounts provided on bridge loans secured by other assets tend to be significantly lower.
Second, even a private 2nd mortgage will only command interest rates in the 9% to 12% range on average where as other forms of asset based bridge loans can command interest rates of 2% to 3% a month making them very expensive sources of capital.
Third, because the determination of value and ownership are easier to establish for real estate, a private bridge loan from a private mortgage lender can be put into place much faster than other forms of bridge financing that require hard security.
In many respects, all private mortgages are actually private bridge loans due to the fact that most private money lenders only provide interest terms of one year making them a very short term form of borrowing.
Another important aspect of private bridge loans is that the use of funds does not typically need to relate to the real estate offered as security.
For instance, a business may have a need to secure inventory for up coming sales orders and wants to leverage the equity in a commercial property to acquire the necessary capital. The resulting private bridge loan would provide the funds necessary to get the inventory in place that is required to complete the order and when the sales margin is earned, the bridge financing could then be repaid.
If you’re in need of a private bridge loan, I suggest that you give me a call right away and I’ll quickly go over your requirements and provide you with some private mortgage options for your immediate consideration.
Construction bridge loans are typically required towards the end of a construction project when a shortfall occurs between the amount of funds available for the project and the remaining costs required to complete the project.
A construction bridge loan is not something that is planned in advance, but more of an emergency funding source to keep the project on track.
And when I say emergency, many times a property owner, builder, or developer will call up and require bridge financing for their project in just a matter of days before a contract is broken, or a contractor or sub trade is going to leave the job, or other costs are going to be incurred because money is not available when required.
The need for a bridge loan can steam from many things including a construction draw cut back that was not expected, a delay in advancing a prearranged construction financing draw, a project cost overrun due to unexpected events or a change in scope that intentionally added more work and cost to the project.
Regardless of what the reason is, you’re now in a situation where additional money has to be acquired to complete the rest of the work remaining.
This is where private mortgage lending can become the best option available to you.
There are private mortgage lenders out there that specialize in these short term construction bridge loans where a decision to fund can be made in a matter of hours and funds available for use within two to five business days.
Because a construction bridge loan is typically required at or near the end of a project, there is very little construction risk left, so especially for bridge loans under $50,000 a private lender can comfortably make a decision to fund the bridge financing requirements very quickly in most cases.
While there is going to be a cost for a private bridge loan that may be higher than your primary source of construction financing if that’s from a bank or institutional lender, its likely going to pale in comparison to the costs you will incur if the project is delayed or stalls out completely.
The key to locating and securing construction bridge loans is to work through a private mortgage broker who places these types of deals and works directly with lenders and lawyers that can provide a fast turnaround from the time of financing request to the actual funding.