Advantages & Disadvantages of Bridge Loans

Mortgage and Lending with Omni Fund, Inc. 1048392

The Advantages of Bridge Financing:

1. It's a Faster Way to Get Financing

The application, approval,verification, and funding process for a traditional loan can take a long time to complete. Meanwhile, bridge loans are usually funded much quicker than a conventional home loan or commercial loan. Bridge loans are offered for either commercial or residential real estate or even a business. Because of this more rapid process, your offer to buy a home looks far better than competing buyers who are offering five or ten percent down  and have contingencies.

Bridge financing is particularly important if you have to finish a project or are trying to bid on other jobs. Whether it's to purchase a home or buy a business, bridge financing can provide you an advantage over on other bidders simply because you can close the transaction quicker.

2. There's No Need to Give Up Partial Ownership of Your Business
Business owners oftentimes go to their equity partners for short term financing when they are waiting on funds to come in. The problem here is when that request of granted the equity partner often wants a greater percentage of  ownership for their investment.

Bridge loans are a solution to obtain short-term financing, so equity partners are not needed. Furthermore, you are able to keep as much control of your business as you presently have. To many people, that is very favorable.

3. Bridge Loans Help You Get Through Extended Payment Periods
In a study by CB Insights it was reported that the top two most common explanations for a new business' lack of success is cash flow issues. This is problematic because although your business seems strong, you could still be at risk of depleting your available cash.

When a stable business begins experiencing cash flow challenges, it's usually the result of payments not being received for extended periods like 120, 180 days or longer.  To illustrate, if you own a home improvement business that redesigns and adds home value for the owners, you may receive a percentage of payment in the beginning and the bulk once the project is completed. In between that time, sometimes you'll still need funds for other business expenses and to finish the project.

This problem is easily solved with bridge financing to get access to cash which to pay for your business costs while the contractual terms of the payment cycle are in effect.

The Disadvantages of Bridge Financing:

1. Payments Are Usually Bigger
Bridge loan terms are generally between 3 month to 2 years. As a result, larger monthly payments are made versus if you have a loan with much longer amortization period. If you have a great deal of cash to make the payments, this is just a small drawback.

However, if you ever become delinquent on your payments, interest and penalties can accumulate quickly. Some lenders will hold back six to twelve months of the loan payment in an escrow account.

2. Things Can Turn Bad if You Can't Make Payments
If you've obtained a bridge loan and you're expecting a large future payment that falls through, you could be trapped with a very big unplanned cost.  If that's not enough, you could find yourself in a situation with extremely high debt to income ratios, causing it to be very difficult to operate your business.

The silver lining is this rarely occurs. U.S. News & World Report data found that less than one or two percent of bridge loans have problems. 

3. There May Be Higher Interest Rates Relative to Traditional Loans
Most lenders who offer this product charge a high interest rate on bridge loans because they are short term loans. So, you should not expect to pay a low interest rate.  This loan is a convenience and comes with a built-in premium.

Additionally it is quite normal for bridge loan lenders to charge higher fees on this loan product. These fees can include origination fees, discount points, application, along with the typical closing costs and third party fees.

Comments (0)