One of the basic questions about bridging finance is how long it takes to get a bridge loan. As a form of short-term finance, bridging loans can meet specific borrowing needs and address temporary financial shortfalls. So it’s no surprise that they had often arranged quickly.
What is a Bridge Loan?
Bridge loans are aptly named: these short-term loans had intended to bridge the gap when individual or corporate investors need cash that is not yet available. They often lend hard money.
Typically, individuals or businesses in the real estate sector seek these loans, also known as bridging financing, swing loans, or gap financing, to cover utilities, rent, and payroll, or the cost of property improvements or to carry them through the lag between the expenditure of one property and the sale of another.
Just as commercial real estate bridge loans help a residential home buyer who needs flexibility until the current home has sold, commercial real estate bridge loans provide some breathing room and peace of mind.
However, this benefit comes at a cost on the base of a higher interest rate than other financing types, such as a home equity line of credit (HELOC). Also, lenders typically only offer real estate bridge finance worth 80% of the combined value of the two properties to borrowers with top credit ratings and low debt-to-income ratios.
Bridge loan terms are typically between 6 months and three years, long enough for other funding sources to become available. Getting bridging loans takes little time.
What is Bridge finance in Commercial Real Estate?
Typically, a person takes out a bridge loan when acquiring a property that needs major repairs or if the building has a lot of space, says Justin Piasecki, managing partner at Levo.
“If someone buys an old office building that the previous owner didn’t take care of and the tenants move out, and it goes from 100% occupied to 60% occupied, you can’t get it permanently as a new owner. , long-term, fixed-rate bank financing because the property had not been fixed,” he explained.
As a new owner, you get a bridge loan. It is usually more expensive than permanent bank financing because it is less risky for a transitional property type.
After the building has improved, tenants rent the vacant space, and owners increase their monthly income with new leases, paying off or canceling the bridge loan.
Bridge loans are traditionally one- to three-year loans to allow you to implement your plan. After stabilization, you can get permanent financing from a bank, CMBS lender, or another lending institution.
How long does it take to get a bridge loan?
Bridge loans have a faster application process, approval, and funding than traditional borrowing. Borrowers are happy to accept higher interest rates — usually double the prime rate. And sometimes other fees because they know they can access faster cash flow.
Depending on the lending institution, potential borrowers can be approved within two weeks or sometimes within two days, followed by financing within two to four weeks. Bridge loans are especially useful if you need to close quickly.
For example, when you buy a property at auction, you win the bid, and they give you 30 days to close. With traditional sales, you may have 60, 90, or 120 days to close, which gives you time to talk to several lenders or banks.
The process with banks takes longer because they are very thorough. But with a bridge loan, you’re paying a slightly higher interest rate, but you’re dealing with a private equity firm or a debt fund set up to move quickly. They offer a service that banks don’t need to close on a property foreclosure quickly.
What can delay getting a bridge loan?
When quick funding is needed, it helps to know what factors can delay a bridging loan application so you can cut back accordingly.
The most common factors that slow down an application are:
- Incomplete or incorrect application information
- Property Appraisal: Lenders generally require a property appraisal to assess security for a loan.
- Legal Issues: If the property or borrower has any complex legal issues, such as title disputes or bankruptcy proceedings
- Credit history: A poor credit history means the lender may require additional documentation – being upfront about any credit issues can speed things up.
- Changes in the borrower’s financial situation: If the borrower’s financial situation changes during the application process, such as losing a job or taking out a new loan, this may affect the lender’s decision on a short-term bridge loan.
- Property condition: If the property, or the property used as collateral, is in poor condition or needs extensive repairs, the lender will need additional information about the work to undertake and who will carry out the work.
- The lender you choose: Some lenders may have a backlog of loans to approve, especially during peak loan periods, and lenders overseen by the FCA have more stringent checks and red tape than unregulated bridge loan lenders.
Components that affect how long it takes to get a bridge loan
Getting a commercial bridging loan requires different steps that vary from lender to lender. Although generally more relaxed than traditional bank loans, various factors affect obtaining these short-term loans.
Lenders look very closely at a company’s bottom line because many small businesses are considered high-risk borrowers. Banks and other commercial lenders must ensure that sufficient cash flow is available to repay the loan.
Most lenders will verify a business’s credit score before approving access to a commercial bridge loan. And determine the applicable terms, such as the interest rate and repayment period.
Since one person or a few partners own many small businesses, lenders may also check the personal credit history of each borrower. They look for red flags like past bankruptcies, loan defaults, or foreclosures.
Now you may be wondering, is a bridging loan right for me? It depends on what you have to use it for and if other options are available. Weigh the opportunities bridging loans offer, as well as the pros and cons, before deciding.
A bridging loan usually takes between 5-21 days to complete. Your choice of lender can greatly impact how quickly your application had completed. Some lenders are faster than others, so shop around if your application is urgent.
A bridging loan affects your credit score. However, lenders are not primarily concerned with credit scores but run credit rating checks on their applicants.
Bridging loans are approved and funded much more quickly than traditional mortgages, making them a good option for property buyers who need to move quickly.
Bridge financing can use for debt or equity during an IPO. Bridge loans are usually short-term in nature and carry high interest.