Bridge Loans: Good, Bad or Both?

A wise person once said that people tend to fear things they don’t understand. This applies to many situations in business, including financing. The more you know about different types of loans, the less frightening and more helpful they can be. What should you know about bridge loans?

Bridge Loans: The Main Points

There are a few basics that can help you decide if bridge financing is right for your business. First, the name: a bridge loan also goes by the name of hard money loan, asset-based loan, ABL financing or private money loan.

What makes this type of loan different from normal bank loans? Well, unlike traditional loans, which often have terms of 25 years, bridge loans provide short-term funding only.

Another difference revolves around collateral. Regular bank loans typically require collateral, too, but they also look closely at factors such as your credit score and revenue. For bridge financing, the entire loan is based on the value of your collateral, including the total size of the funding.

The Advantages of Asset-Based Loans

On the plus side, bridge financing is extremely fast, flexible and comfortable for small business owners. Normal loans take anywhere from 30 days to 90 days or more for the approval process. Comparable ABL financing only takes about 10-14 days. That’s a huge difference!

It’s not surprising that so many real estate businesses use bridge loans constantly. With fast approval, it’s easier to find great properties, perform necessary improvements and sell for a profit. Of course, ABL financing also works for remodeling projects for investment properties.

Another advantage relates to the qualification process. Bank loans can have tons of requirements, from your annual revenue and credit rating to your time in business and other business assets. Bridge lending is different.

As long as you select a valuable property and show that it’s a good investment, the other factors aren’t very important. Even startup fix-and-flip companies may qualify.

Potential Risks To Keep in Mind

All of this flexibility comes with a few costs. First, bridge financing has higher interest rates than traditional loans. You need to factor in the payments when choosing real estate properties to make sure the deal is worth it.

Also, bridge loans are only for short-term goals. Before applying, you need a plan to ensure you have the funds for repayment. Don’t just assume a property will sell right away. Do your homework so you can have a smooth project. That’s how professionals make great profits.