Is bridging financing right for you? – Finance and Banking
United States: Is bridging financing right for you?
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Bridging loans can provide short-term financing before developers and investors commit to long-term financing. Their popularity soared during and after the Great Recession – and that popularity continues to this day. But if you’re considering getting a bridging loan as part of a new business or refinance, or for site improvements, you need to know the potential pros and cons.
ADVANTAGES OF BRIDGE FINANCING
The typical term for a bridging loan is 12 to 36 months. This can give you the time to address issues that are preventing you from securing traditional financing or other avenues. For example, bridging loans can be helpful if you:
- Close a deal with an upcoming deadline;
- make renovations;
- Get a property out of foreclosure;
- stabilize cash flows;
- Track environmental cleanup;
- Replace a tenant; or
- Improve your credit score.
If you are looking for long-term financing, you can pay off the bridging loan either before or after you search. You improve your chances of getting this funding by making timely payments on the bridging loan. If you decide to repay after finding long-term financing, you can use some of those funds to pay off the bridging loan.
Additionally, bridging loans typically require fewer income documents and close faster than traditional loans, giving you the money in about a week. And they can be non-recourse, so you can protect other assets.
DISADVANTAGES OF BRIDGE FUNDING
Bridging loans come with higher interest rates (usually based on market-based interest rates), transaction fees, and closing costs than traditional loans. They can also generally require a high loan-to-value ratio and balloon payment.
Lenders also monitor bridging loans more closely than traditional loans. As a result, you could face costly penalties if you fail to meet complex debt coverage ratios or debt yield tests, for example. If you plan to pay off a bridging loan with long-term financing, you’ll be left behind if that financing doesn’t materialize. If you don’t make the payment on time, the interest costs will quickly pile up. These concerns are particularly relevant given recent concerns about a looming recession.
There is also no guarantee that you will qualify for a bridging loan. Lenders typically require exceptional credit, a low debt-to-income ratio, and a significant portion of equity.
TO SEEK ADVICE
In the right circumstances, bridging loans can provide a flexible and worthwhile solution to short-term financing needs. But they are not without significant financial risk, so exercise caution before signing. Financial advisors can help you determine if a bridging loan is right for your project and negotiate the best terms with a lender.
The content of this article is intended to provide a general guide to the topic. Professional advice should be sought in relation to your specific circumstances.
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