One criticism often leveled against hard money and bridge loans is the short terms for which they are known. The loans typically have terms of 6-12 months. Rare is the loan that exceeds 24 months. This is seen as a negative for borrowers. But there are advantages in the short terms, especially to real estate investors.

Investors will be the main focus of this post. They receive the lion’s share of the hard money and bridge loans Actium Lending makes. Though they have other financing options, many choose hard money or bridge financing as their first option.

Short Terms Force Financial Discipline

Hard money and bridge loans with short terms are optimized for quick exit. They are ideal for keeping a real estate investor on track. How so? By forcing financial discipline. A short term creates a deadline that helps the investor maintain focus. An investor is less likely to fall victim to ‘project creep’ and other things that drain resources.

Good financial and project management discipline are two of the keys to successful real estate investing. With short-term loans in play, an investor can get in, get out, and move on to the next project. The most disciplined can complete more projects because they do a better job of staying on track.

Shorter Terms Free Up Cash

The short terms associated with hard money and bridge loans are also beneficial in the sense that they free up cash. The best way to understand this is to compare terms of 12 and 120 months. Assume that each loan is carried to its full term.

A borrower makes twelve monthly payments on the short-term loan. He dedicates a certain amount of cash to those payments. He makes a balloon payment in the final month and moves on. Now his cash is available for other things.

Meanwhile, another borrower needs to dedicate cash for a full 10 years on the long-term loan. That translates to precious cash going to loan service, month after month, for a full decade. It is cash that cannot be put into other projects.

Shorter Terms Translate to Less Interest

Perhaps the biggest incentive to embrace a short-term loan is the opportunity to pay less interest. Experienced borrowers know that time is the single biggest factor in determining how much total interest is paid. The longer the term, the higher the total interest.

This reality plays out even though hard money in bridge loans tend to have higher interest rates. Shorter terms more than offset the higher rates, saving money in the long run. The borrower will pay considerably less interest if they pay off a bridge or hard money loan promptly.

The Key Is a Solid Exit Plan

The key to making a short-term loan work is coming up with a solid exit plan. If you have never borrowed via a hard money or bridge loan, an exit plan is simply the means by which you intend to pay off your loan at maturity.

Note that a typical hard money or bridge loan is structured as an interest-only loan. That means the borrower makes only interest payments until the last month of the term. The last payment includes the final interest installment plus the principal.

Short terms might seem like a negative for borrowers. But where hard money and bridge loans are concerned, especially when they go toward real estate acquisitions, short terms are actually a good thing. They keep borrowers on track, free up precious cash, and reduce the total amount of interest a borrower pays.