Bridge loans have many names, including hard money loans, asset-based loans and ABL financing. The basic method of funding is the same regardless of what it’s called, though in real estate the term “bridge loan” is generally used most frequently. A bridge loan is a large loan that uses real estate as collateral. How does this type of funding work in practice?
The Main Things You Should Know About Bridge Loans
Real estate costs a pretty penny. You may be able to cover part of the cost with funds from savings or other property sales, but few companies have enough to front the entire cost of real estate. You need financing, and quickly, if you want to snag a great property before it disappears from the market.
That’s where bridge loans come in. They help you get funds for the property purchase by using that property as collateral for a loan. With the extra infusion of capital, you may only need a down payment of 25% to buy the real estate you want.
All asset-based loans are short-term loans with excellent flexibility and speed. In real estate, they’re used to close on properties and take care of improvements for resale. In other areas of business, bridge financing can help with everything from inventory purchases to project materials.
The Factors You Need To Consider
Bridge loans have pros and cons for business owners. Whether they’re a good fit for your company depends on its financial needs, revenue, and cash flow, as well as your overall goals for business growth.
One factor to consider is the short-term nature of bridge financing. Unlike traditional loans with 25-year terms, ABL financing generally only gives you one or two years for repayment. That’s why it’s popular with fix-and-flip companies, sales businesses, and real estate agents.
Another important factor is speed. When you have to meet urgent deadlines, it may be worth getting a fast and flexible loan even if you pay more in interest.
Other Ways To Use a Bridge Loan
Some companies use ABL financing to help with funds while waiting for long-term loans to be approved. This is an excellent option, but you need good credit for it to work.
You should only use a bridge loan for things that generate profit. That way, you get the funds to pay off the loan completely in a short time. ABL financing isn’t a good fit for improvements to your business property, but it’s amazing for remodeling and reselling investment properties.