Posts Tagged ‘bridge loan’
Keys To Bridge Loan Financing
August 6th, 2010
“If You Need Money In a Hurray, Bridge Financing Could Very Well Be The Answer”
When a business owner or manager are under the gun trying to get financing in place for some need where there is some sort of official or self imposed time limit in place, one option to consider to get the capital you need is through bridge loan financing.
A bridge loan by definition is a loan for a specific purpose that will be repaid by a certain time or event in the future. The more predictable and verifiable the reliable the repayment plan, the more likely that a bridge loan can be arranged.
The most common use of bridge loan financing is when there is a gap between two ends of a transactional event with respect to time and capital is required to facilitate the transaction. In these cases, the capital is required to start the transaction and the completion of the transaction will pay back the bridge loan.
Regardless of how compelling or verifiable or predictable the exit strategy or repayment strategy for the bridge loan is, there is considerable risk of loss present in most of these situations.
As a result, the cost of financing can be much higher than what you would expect for traditional business financing. In fact, for some deals, the bridge financier may expect that you split the profit margin of the transaction with them as compensation for the money being advanced and the risk being taken.
While the effective financing rates in these scenarios may seem extreme as a result, the alternative may be to not do the deal at all at which point 50% of the potential profit is better than 0%.
A typical bridge financing arrangement that occurs every day is with the buying and selling of residential or commercial real estate. The borrower has purchased a new property and is trying to sell an old property at the same time, creating the need to utilize the equity in the old property to help finance the new property through a short term bridge loan. This is a very low risk transaction in most cases and as a result the relative cost is much lower than other bridge loan transactions.
The key to bridge loan financing though is the exit strategy. The more certain the repayment plan is, the more lenders will be interested in the deal and as a result, the lower the cost of borrowing will be.
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Business FinancingBridge Financing Basics
December 15th, 2009
What Is Bridge Financing, And When Should You Consider Using it?
Bridge financing is simply a short term loan that helps facilitate the completion of a transaction. The term bridge is used to illustrate that what you’re trying to finance has a clear and definite beginning point and ending point.
In many cases, bridge financing is sought to complete a transaction quickly so that more suitable longer term financing can be secured over a less compressed period of time.
In other cases, a bridge is strictly used for completing a transaction whereby when the entire transaction has successfully closed, proceeds from the transactions will be used to pay back the bridge.
Conventional debt financing programs like factoring, inventory financing, purchase order financing, private mortgages, and other forms of asset based lending are basically bridge loans in disguise.
The key characteristics of most bridge loans is that they are a more expensive form of debt financing, but that they can also be put into place rather quickly and are designed to manage the risks associated with an incomplete transaction.
In order to secure a bridge, the borrower typically has to have something of value to pledge that the bridge financier would be interested. The most common form of security is real estate. A Bridge secured by real estate can potentially be used for all sorts of purposes in that if the underlying transaction or activity being funded is not successful, the lender will just realize on the real estate security.
Other forms of assets can be used to secure a bridge. In most cases, however, the lender will require possession and potentially legal control of the assets to protect their interests which is why real real estate tends to be the security of choice.
In terms of when to use a bridge, you need to go back to the earlier definition…the transaction or application of capital must have a clear beginning and ending.
If you can see clear to the other side of a transaction and all that stands in your way of a profit or ownership of a long term appreciating asset is capital, then a bridge should be considered. As long as the return potential of the transaction is greater than the cost of the bridge, a short term bridge loan may be a very shrewd financial decision.
The reasons why bridge loans aren’t considered more often is 1) individuals view them as too expensive and 2) people think that lower cost financing should be easy to come by.
There is no question that bridge financing can be pricey. This is opportunistic based lending that takes full advantage of the time pressures that cause deals to fall apart when traditional financing can’t be secured on a timely basis.
Which leads in to the second point.
Commercial financing for any type transaction that is not straight forward is almost never easy. The process can take way more time that you think and even when you get a commitment to fund, there can be several conditions that need to be met before any funds are advanced.
The notion of easy to secure financing kills more deals that you can image.
And that’s why bridge financing should always be considered either as a back up plan or as a short term form of financing that gets the deal done and buys time for you to find a more suitable longer term business finance solution.
From a cost point of view, which would you rather have? A smaller return or nothing? Most people will say they will take a smaller return if they had too, but don’t spend any time getting a bridge financing contingency in place because their so focused on getting traditional financing locked in by the deadline.
So in many cases, they end up with nothing.
Personally, I wouldn’t use bridge financing if I didn’t have to either. The trick is knowing when you need to bite the bullet and pay the piper, versus running out of time and driving your deal over a cliff.
Something to consider.
Business Financing