A bridge loan could be the perfect tool for financing that new commercial property you have had your eye on. Bridge loans can be arranged quickly. They can be paid off quickly as well, eliminating the risk of tying up your cash in a long-term loan agreement. Still, a bridge loan doesn’t always make sense.

One of the keys to being a successful private lender is helping clients figure out their most advantageous financing options. We are happy to recommend bridge loans when they make sense. Otherwise, we are not afraid to recommend other forms of financing.

If you are new to private lending – particularly hard money and bridge loans – you might not fully grasp what bridge loans are for. Needless to say, they are distinct and different from other types of financing. That is why a bridge loan sometimes makes sense while other times it does not.

Bridge Loan Basics

A bridge loan is a short-term loan intended to bridge the gap between an immediate financial need and a source of future income. One of the most common scenarios we see involves taking out a bridge loan to acquire a new piece of property even while attempting to sell something else from the portfolio.

Ultimately, the sale of the existing property will fund the acquisition of the new property. In the meantime, a bridge loan makes it possible for the investor to acquire that new property. When the existing property sells, its proceeds cover bridge loan repayment.

4 Scenarios in Which It Makes Sense

Coming up with some hard-and-fast rules explaining when a bridge loan makes sense isn’t possible. Every lending scenario is different. But we can give you an idea of how clients use bridge loans by proposing four different scenarios:

1. You Need Equity to Make the Down Payment

The first scenario involves coming up with a down payment for that new property. You cannot swing the full amount without leveraging equity in one of your portfolio properties. You choose a property and put it up for sale. In the meantime, it acts as collateral on the bridge loan. You effectively harness its equity to come up with the money you need to finance the new property.

2. You Are Expecting a Quick Sale

A second scenario involves a quick sale of your portfolio property. You have just put it on the market, and you expected to sell within a few weeks to a couple of months. In the meantime, you cannot wait that long to make a decision on the new property. There are other buyers waiting to step in.

3. You Are Dealing With a Conservative Seller

You might find a bridge loan the perfect tool if you are dealing with a conservative seller who appears nervous about contingencies. He wants to sell, but he wants a no-strings-attached deal. Having to wait on you to sell your portfolio property isn’t going to work.

4. Your Bank Is Showing Signs of Unease

Finally, a fourth scenario for which a bridge loan makes sense is working with a bank beginning to show signs of unease. The longer it takes your bank to get a deal done, the more nervous your banker gets. Why take that chance? A bridge loan can bypass your bank completely.

Actium Partners makes hard money and bridge loans in Utah, Idaho, and Colorado. We cannot say for certain that a bridge loan would be your best choice for funding that next property. But we can say that looking into bridge funding is at least worth your while.