What Is a Bridge Loan and How Does It Work?

Author Lisa Stern Read bio
Tags: bridge loan commercial real estate loan
Date: February 12, 2021

Corporations around the world spend billions of dollars helping medical and office buildings through bridging financing and loans, on behalf of the borrower, providing flexible payment options when certain money problems occur.

Although occupancy rates and stabilization of the property are in flux, IPG brokers can secure an interim capital solution that would bridge the borrower for a short-term period until permanent financing is placed. The execution and the outcome are a perfect fit for the borrower.

These kinds of transactions are all done through short-term loans, known also as bridge lending, typically set up for a period of 2 weeks to 3 years, depending on if the arrangement needs larger or longer financing.

What Is A Bridge Loan in Real Estate?

What is bridge financing? A bridge loan or bridge lending is a term used by borrowers who need to “bridge the gap” between paying off an existing construction loan for developing or renovating a property, and taking out a longer-term traditional loan.

Commercial real estate bridge lending is a financial product with which you can facilitate the purchase of secondary property, by placing a lien against a primary property.

They are often called a ‘softer form of “hard money” loans, with loan terms that can go up to three years, with a bridge loan interest rate between 6% or 9%, and LTVs of approximately 80%.

While this Short-term loan is commonly used in business while waiting for long-term financing. Consumers typically only use them in real estate transactions where immediate cash flow needs to be met.

How does a Bridge Loan Work?

In simpler words, bridge lending provides a solution for customers who wish to purchase a new property, but have not yet sold their existing property. Both corporations and individuals use bridge lendings to customize many different situations.

Bridge lending can help homeowners buy a new one by using the equity in their current home for the down payment on the purchase of a new home (building etc). They give the homeowner some time and, therefore, some peace of mind while they wait.

The downside of this is that the bridge loan interest rate is usually higher interest rate and people who still haven’t paid off their mortgage end up having to make two payments – one for the bridge loan and the mortgage for the old home until it’s sold.

Women signing documents

Bridge Loans vs. Traditional Loans

So, how does a bridge loan work? Although bridge loans usually have faster application, approval, and funding process conveniences as opposed to regular loans, they tend to have relatively short terms, high interest rates, and large origination fees.

Generally, borrowers accept these terms because they are in need of fast, convenient access to funds. Customers are willing to pay high interest rates because they know the loan is short-term and plan to pay it off with low-interest, long-term financing quickly. Additionally, most bridge loans do not have repayment penalties.

Bridging Finance Advantages

What is bridge financing good for? Clients frequently utilize bridge loans for situations that require creative, decisive, and rapid performance, such as time-sensitive real estate acquisitions, unanticipated expenditures, cost overruns, and short-term market demands. Delivering customized financing solutions for hundreds of clients, IPG offers a whole team specialized in leasings and financing for various needs:

  • Acquisition and refinancing
  • Stabilized and non-stabilized properties
  • All major property types including residential, multi-family, office, industrial, retail, warehouse, etc.

Using a bridge loan, you can buy a house before you sell the old one, provide peace of mind and flexibility by obtaining additional time to sell your existing property, use the equity in your current home for a down payment and provide the funds and time to make upgrades to your new home before you even start living there.

Business Bridge Loans Are Fast and Convenient

By their nature, bridging finance must be convenient. They are designed to ‘fill in’ quickly, so they are often granted almost instantly. There would be little point in this service if it would hang around too long, considering a high bridge loan rate.

Bridging finance is designed to procure capital in a tight corner, so if you’re feeling the squeeze, a bridge loan could be the solution you need.

Bridging finance offers chances for early Investment

Don’t wait around to start a new project. You could miss potential clients and opportunities if you are constantly thinking about the money or the lack of it. 

Perhaps you’re waiting for a bank loan to come through and buy the equipment, software, or tools your staff needs to get started, but sometimes the more you’re waiting, the waste of money is greater. Your employees might be frustrated because they can’t do their jobs, and at the same time, you’re covering overheads without obtaining the ability to make the most of your means.

Money from a bridge loan can allow you to make the purchase earlier and minimize downtime. It can also be used to pay for equipment repairs and keep your business running smoothly.

Potential disadvantages of bridge loans

Bridge loans are a type of unsecured loan.

You have to bear in mind that a bridge loan isn’t attached to one of your assets, such as equipment or business property. A secured loan is one where an asset is placed into the agreement known as ‘collateral’.

With these loans, the lender can try to take legal ownership (repossess) of your collateral if you fail to repay the money. Because of the unsecured structure of a business bridge loan, you’re taking on less risk, while the lender takes more.

As a result, a customer is getting a more stable footing than with a secured loan, leaving nothing for the lander to grab and take back beside the money.

  • Bridge loan rates can be more expensive than conventional financing, but the shorter loan term can help offset the cost.
  • A bridge loan can vary widely in terms, costs, and conditions.
  • A bridge loan can be a higher risk because you’re essentially taking on a new loan with a higher rate and no guarantee that your existing home will sell during the life of the loan.

Bridge loans are expensive and this is a universal truth, that everyone in the financing industry knows. The easier it is for the company to qualify for the money – the quicker it can be accessed with it. 

If you have now understood what a bridge loan in real estate and how a bridge loan works, you should bear in mind that this form of bridging finance carries much higher financing charges than a more conventional long-term loan. The higher financing costs explain why companies use bridge loans as only a short-term solution, instead of a long-term funding tool.