Bridge Financing: Short Term Loans Stepping Stones to Long Term Financing

What happens when you have a real estate deal closing in less than a week and your lender called and wants more time to put together all of the paperwork for the agreement? Your future plans depend on the closing that property.

You start looking for fast money. In many circles that is called a bridge loan, in some, they are called hard money loans. There are companies and even some banks that have a department that specializes in making these types of loans.

Banks which have bridge loans available will be looking to capture your financial where-with-all by bring you into their realm or influence. They would want to provide you with long term financing for the real estate and whatever projects you have planned. They will also want you to move your accounts into their bank.

Often time, this can be most beneficial to you and your company. The bank may be actively aggressive in pursuing your business, even knowing that you have a time dead line that you are facing, if you are the type of client that the bank needs to fill their client profile.

The loan term for the short term loan (bridge loan) will be more in the favor of the bank; so if your plan is to stay with this bank for the long term, make sure that the terms of the permanent funding, is in your favor. Remember that all short term loans (less than five years) will carry a higher interest rate than say, a ten or fifteen year loan. And yes, you can write off the interest as a business expensive, but that is still dollars out of your pocket.

Be sure that there is no pre-payment penalty on any financing that you do. You should structure the bridge loan so that it will be paid off directly when the long term funding is in place. Hopefully, it will not take a long time to put that loan in place.

It took a six month period for me to find permanent funding for a small (but expensive) project several years ago. The short term interest rate was one per cent a month, yes twelve per cent interest. The terms were payment of interest only with the principle due at the end of the second year, with no pre-payment penalty. The rate was steep but the time frame was short. We put the deal together in two days. And yes, I pulled all my money out of the bank that was dragging their feet.

A local bank was happy to service our business accounts and eventually they provided the long term solution that we needed. Part of the holdup was the bank needed additional funding from the Federal Reserve Bank; the other part, we were not sure that we wanted to be the bank’s largest client. A little spooky, you know?!

The point is, there are short term bridge loans available in the market place. Your job is not only to find them, but also to provide the backup the lender will want to see, i.e., how are you going to repay the loan. Be ready if time is short – have everything ready to go; and do not stop with one lender, talk to as many as you are comfortable in doing so.

For more ideas for funding your business, go to SecuredBusinessLoans.org.