Commercial Bridge Loans: How They Work and Best Options

A commercial bridge loan is a type of short-term financing that’s used to fund an immediate opportunity, typically in real estate. Unlike other small-business loans, commercial bridge loans are specifically used to “bridge the gap” between your current need for capital and a more long-term financing solution.

Commercial bridge loans can be issued by banks and online lenders as well as private lenders that specialize in commercial real estate. In general, lenders offer customized loan structures based on your individual needs, with repayment terms that can range up to three years.

Bridge loans tend to be secured with collateral — usually the real estate you’re looking to purchase or renovate. The value of your collateral affects the loan amount you’re eligible to receive.

Commercial bridge loan lenders typically use the loan-to-value ratio or loan-to-cost ratio to determine how much capital they’re willing to offer. These calculations also help them assess the risk of lending to your business.

The loan-to-value ratio, or LTV, is calculated by dividing the loan amount you borrow by the value of your collateral. This ratio is used when you’re purchasing or refinancing a property. Similarly, loan-to-cost ratio, or LTC, is calculated by dividing the loan amount you borrow by the construction cost. This is used for renovation or construction projects.

Say, for example, you have a piece of land valued at $250,000. You ask a commercial bridge lender for a loan, but to avoid too much risk, the lender decides to offer you a loan of $200,000. To calculate your LTV, you would divide $200,000 by $250,000 and get 0.8, or 80%.

Commercial bridge loan lenders tend to offer loan amounts with LTVs or LTCs that range from 65% to 80%. As the borrower, you’ll be responsible for financing the remaining percentage.

Because commercial bridge loans are directly connected to the value of your collateral, some lenders may not rely as heavily on traditional loan requirements when evaluating your application.

As a result, however, these short-term loans tend to have higher interest rates than other business loan options. These loans may also require additional fees, such as processing fees, appraisal fees and escrow fees, among other real estate costs.

» MORE: Commercial real estate explained

To get a better understanding of commercial bridge financing, here are a few examples of how you might use this type of loan for your business:

• Take advantage of an immediate real estate opportunity. You can use funds from a bridge loan to purchase a property that has just gone on the market. Once you’ve secured the property, you can refinance your bridge loan with a more affordable, long-term commercial real estate loan.

• Wait to qualify for permanent financing. If you’re working on a real estate project but can’t yet qualify for long-term financing, a bridge loan may be able to tide you over. You can use the capital from the bridge loan to continue your project while resolving any issues that are preventing you from accessing a long-term loan.

• Cover working capital needs while a business deal is in progress. If your business has a big sale or an acquisition lined up but needs capital in the meantime, you might use a bridge loan to access cash. The money from the loan will help you cover your day-to-day operations, and then you’ll be able to repay quickly when that sale or acquisition is finalized.

• Invest in a fix-and-flip project. Bridge loans can be used as fix-and-flip funding, which allows you to buy and renovate a property to resell it for a profit. These loans can give you fast capital — and after the fix-and-flip project is completed, the money from the sale will allow you to repay the loan all at once, without having to worry about a long term.

The best commercial bridge loan will be the most affordable financing you can qualify for that meets your needs. As you compare lenders, you should think about funding time, prepayment penalties (or incentives), application process and customer support.

Here are some options to consider:

Banks and credit unions

If you’re looking for the most competitive rates and terms, traditional lenders, like banks and credit unions, can be a good option. It’s important to note, however, that not all banks offer bridge financing, even if they offer commercial real estate loans.

It may be helpful to start with a local bank or credit union — or one with which you have an existing relationship — to see whether they offer bridge loans.

In any case, you’ll need to meet strict criteria to qualify for a commercial bridge loan from a bank. You’ll typically need excellent credit, at least two years in business and strong annual revenue.

Business bank loans are also usually slow to fund — with timelines ranging from several days to several weeks. Nevertheless, you may want to consider these lenders if you have strong credentials and your capital needs aren’t immediate.

Direct lenders

Direct bridge loan lenders use their own money for loans to businesses seeking financing. These private companies specialize in the commercial real estate industry and provide their expertise in addition to funding.

You can find direct bridge loan lenders that work across the U.S. or those that work specifically in your area. Although loan details vary from lender to lender, many of these companies offer repayment terms up to three years, no prepayment penalties and interest-only payments.

Avana Capital, for example, offers short-term commercial bridge loans for hotels, health care facilities, retail stores, restaurants and other facilities. The company finances up to 75% of the as-complete value of the project, with interest-only payments, for one to three years.

You can complete a loan request form on Avana Capital’s website and receive preapproval in as little as three days. Then, you’ll work with a loan expert to complete the process and close on the loan within 10 to 30 days.

And while Avana Capital doesn’t include eligibility criteria on its website, some direct lenders have fairly flexible requirements, making them a possible alternative for those who can’t qualify for a bank loan.

Capital Funding Financial, for instance, requires a minimum personal credit score of only 600 and largely bases its underwriting on the value of your property. This company can also close loans within seven to 14 days, which may be faster than some other options.

» MORE: Best commercial real estate lenders

Online lenders

It may be difficult to find an online lender that offers bridge financing for commercial real estate. If, however, you’re looking for a bridge loan to purchase inventory or cover working capital needs in between sales, you may find some options, like National Funding or QuickBridge, to consider.

For these purposes, online lenders can provide the quickest and most flexible financing — in some cases, funding applications in as little as 24 hours. You may be able to qualify for one of these loans even if you’re a startup or have bad credit, although interest rates will be higher.

If you’re investing in a commercial real estate project, you’ll likely need to borrow money at some point during the process.

A commercial bridge loan can be a good option when you receive funding quickly to take advantage of an immediate opportunity. On the other hand, commercial bridge loans can have high interest rates and fees, which can be difficult to repay over a short period of time.

In general, your new opportunity should help you generate the capital you need to repay the loan. If you’re not secure about your return on investment, you might consider other financing solutions before opting for a bridge loan.