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Commercial Bridge Loans: The Ultimate Guide

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If you’re looking for business financing—particularly to purchase or fund a real estate project—you may have come across commercial bridge loans. Bridge loans, however, are a very unique type of short-term financing that function differently from typical business loans.

So, what exactly is a commercial bridge loan and how does it work?

We’re here to help. In this guide, we’ll explain everything you need to know about this type of financing to determine if it’s right for your business needs.

What is a commercial bridge loan?

As we mentioned, commercial bridge loans are a very specific type of financing and differ from other types of loans. Bridge loans—also referred to as bridge financing, swing financing, or gap financing—are used particularly to finance an immediate opportunity, typically in real estate. As the name implies, commercial bridge loans are used to “bridge the gap” between a business’s current need for financing and a more long-term financing solution.

This being said, as a concept, business bridge loans can be a bit confusing because the title “bridge” only describes how a borrower uses the loan, rather than describing any specific characteristics about the loan itself or its terms. Technically, therefore, any type of business loan could be a commercial bridge loan, as long as you use it a particular way.

Nevertheless, it’s safe to say that, when it comes to business bridge loans, you’re most often talking about commercial real estate bridge loans. In other words, these are loans that are used to finance a real estate purchase or renovation immediately, while you’re in the process of arranging a long-term form of funding. In fact, bridge loans are frequently used by individuals to bridge the gap between the purchase of a new home and the selling of their current home.

Of course, commercial bridge loans, however, refer specifically to bridge loans used by a business—for commercial purposes.

With all of this in mind, here are a few key points to help your understanding of commercial bridge loan financing:

  • Commercial bridge loans are short-term or interim financing—terms, therefore, are usually on the shorter side—between a few months and a year.

  • Collateral is typically used to secure these loans—most often, the real estate you’re purchasing or renovating will serve as collateral on the loan.

  • Although lenders will consider traditional business loan requirements, the value of your collateral will also play a large role in whether or not you qualify.

  • Bridge loans are usually fast-to-fund—but can come at high interest rates.

  • Commercial bridge loans can be issued by banks, alternative, online lenders, as well as private lenders, like hard money lenders.

How do commercial bridge loans work?

Now that we’ve gone through an overview of commercial bridge loans, let’s discuss a little more about how they actually work.

Ultimately, these loans may function slightly differently depending on your specific needs and the lender you’re working with. On the whole, however, you might look for a commercial bridge loan when you’re presented with an urgent real estate opportunity.

This commercial real estate bridge loan would provide you with the funding to take advantage of the opportunity immediately—and then you would be able to find a more affordable, long-term form of financing or refinance your existing business loan.

Once again, as we mentioned above, you’ll usually find that lenders offering commercial bridge loans will require that you put up your real estate property or investment as collateral and will offer fairly short terms. Additionally, commercial bridge loan lenders will typically determine the loan amount they offer based on the property that you’re purchasing, acquiring, or renovating. Lenders will evaluate this property in terms of loan-to-value ratio (LTV) or after-repair value ratio (ARV)—and offer a loan amount equal to 70 to 80% of the property’s value.

Then, as the borrower, you’ll be responsible for financing the remaining percentage.

If you get a commercial real estate bridge loan from a bank, you can expect interest rates to be higher than typical bank loans—ranging anywhere from 6% to 11%. If you work with an alternative lender, your rates could range anywhere from 7% to 30%.

Moreover, you can expect bridge loans to require more fees than some other types of loans. You’ll likely have to pay an origination fee—and you may be required to pay appraisal or other similar fees.

All of this being said, let’s look at a few common use-cases for commercial bridge loans to get an even clearer sense of how they work.

Investing in commercial real estate

As we’ve mentioned already, business bridge loans are practically synonymous with commercial real estate bridge loans.

These loans, sometimes also called commercial mortgage bridge loans, allow you to take advantage of an immediate real estate opportunity.

For example, say, for instance, a prime storefront in a busy shopping area in your town is about to go on the market. With a commercial bridge loan, you can secure the funds necessary to purchase the storefront immediately.

Then, once you secure your storefront with this financing, you can then refinance it with a more affordable commercial real estate loan, which will likely take a bit of time to find, apply for, and qualify for.

Tiding your business over before acquisition

Although bridge loans are most commonly used for real estate, they also can have a variety of other uses.

For example, say your business is working through an acquisition deal. You may take on interim financing, in this case, commercial bridge loan financing, to access capital until the acquisition is complete.

This scenario typically qualifies as bridge financing because your business has an impending source of capital lined up—the purchaser—to get out of the short-term financing in the near future.

Even if, in this situation, the loan is never formally refinanced, the use of proceeds to tide your business over until you receive the pay-off from the acquisition, still qualify it as a form of commercial bridge financing.

Stocking up on inventory

Finally, one last example of a use-case for commercial bridge loans is for stocking up on inventory.

Let’s say you come across a huge liquidation sale of inventory that you typically stock—you’ll likely want to take advantage of this opportunity to stock inventory at a discounted rate. In this case, you’ll need access to a significant amount of capital, and quickly.

Therefore, you might take on short-term financing in the form of a commercial bridge loan to make this purchase. After you secure the inventory, you can then refinance your bridge loan with a longer-term, more affordable business loan.

What to look for in a commercial bridge loan

So, if you think a commercial bridge loan might be able to meet your business financing needs, there are a few things you’ll want to keep in mind as you start your search.

Of course, you’ll want to look out for the qualities of a loan that you would for any type of loan—interest rates, terms, loan amount, fees, lender reputation, etc.

However, with this type of interim financing, you’ll likely want to pay attention to two fundamental characteristics in particular:

  • Funding time: Any commercial bridge loan you’re considering needs to fund quickly enough to allow you to put the proceeds toward whatever urgent expense you have. As a result, depending on your timeframe, you may need to look outside traditional lenders. Typically, banks are slow to fund business loan applications, and therefore, it may be worth looking into your commercial bridge loan options from alternative lenders—who can sometimes fund your application in as little as one day.

  • Prepayment incentives: Ideally, your commercial bridge loan should offer some sort of prepayment incentive—after all, by definition this type of loan is temporary and you should want to pay it off early. For example, if you take a bridge loan that is amortizing, paying it off early will mean that you’ll save money by avoiding interest. On the other hand, if you take on a commercial bridge loan with a factor rate—which typically means you’ll pay a set amount of interest no matter what—you should make sure it comes with a prepayment discount. In this way, if you have to pay a significant prepayment penalty for paying off your loan early, you might want to keep exploring other options.

Top commercial bridge loan lenders

As we’ve discussed, there are a variety of places you can turn to access commercial bridge loan financing.

In all likelihood, if you can qualify and wait for a loan from a bank, they’ll be able to offer you the most ideal rates and terms.

This being said, however, if you’re looking for faster funding, a simpler application process, and more flexible requirements, you might consider the following commercial bridge loan lenders:

Fundation

First, Fundation is an alternative lender that will offer funding with longer repayment terms, but that can still fund just as quickly—if not quicker—than their shorter-term counterparts.

Fundation offers medium-term loans of up to $500,000 with repayment periods from one to four years. Interest rates on these loans range from 8% to 30% APR.

Additionally, although Fundation funds loans in an average of three days, they are able to fund applications within one day. Plus, Fundation won’t charge you a prepayment penalty when you refinance or pay your debt down early.

To qualify for a loan from Fundation, you’ll need to have $100,000 in annual revenue, a personal credit score of at least 600, and at least two years in business.

Credibility Capital

Next, you might consider Credibility Capital as your commercial bridge loan lender.

Credibility Capital also offers medium-term loans with no prepayment penalties—plus, their loans are fully amortizing, so if you pay off your loan early, you’ll save on interest.

Credibility issues loans up to $350,000 with terms up to 36 months and interest rates ranging from 8% to 20%. Compared to some alternative lenders, Credibility will take a little longer to fund your application—typically around three to five days—however, they do offer lower rates than many other online lenders.

To qualify for a commercial bridge loan from Credibility, you’ll need to have at least two years in business, be currently generating revenue, and have strong personal credit.

SBA Express Lenders

If your business is recovering from a disaster, you might be interested in this specialized type of commercial bridge loan: the SBA Express Bridge loan.

Although this is currently a pilot program running through September 30, 2020, it’s a worthwhile option for businesses that need access to capital while they apply for longer-term disaster financing.

The SBA Express Bridge loan program is part of the 7(a) program and offers loans up to $25,000 with terms as long as seven years. These loans are issued by SBA lending partners participating in the SBA Express program.

Therefore, if you’re recovering from a declared disaster and need interim financing while applying for a long-term loan, like an SBA disaster loan, you might consider looking into the SBA Express Bridge loan program.

The bottom line

At the end of the day, although commercial bridge loans are a clever solution to a common financial problem, it’s important to recognize that they also come with their fair share of risks.

Businesses often take on commercial real estate bridge loans and end up unable to pay off this high-interest debt. Therefore, if you’re considering one of these loans, you should be sure that your investment will pay off so that you’ll be able to repay the debt you’ve taken on.

Ultimately, only you can decide if this type of loan is right for your business. This being said, however, it’s worth exploring all of your financing options before opting for a commercial bridge loan. You’ll want to compare different products in order to find the most affordable, desirable funding for your business.

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How to Get a Loan to Buy a Business

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Not everyone wants to take on the challenge of building a business from the ground up. An attractive alternative can be to step into a business that’s already up and running by purchasing it from the current owner. Some advantages of buying a business may include easier financing, an established customer base and an existing cash flow.

Buying a business is different from buying a franchise. Franchises have a set business model that’s proven to work. However, when you buy an independently operated business, it’s important to show the lender that you, your previous business experience and the business you want to buy are a winning combination.

What lenders look at when you want to buy a business

Because lenders can view the performance record of an existing business, it’s typically easier to get a loan to purchase an existing business compared with startup funding. However, your personal credit history, experience and details about the acquisition business still matter.

Your personal credit and experience

Through credit reports and credit scores, lenders are able to assess how you’ve managed debt in the past and potentially gain insights into how you will handle it in the future. Your education and experience will also be evaluated.

Solid credit history: Lenders look to see if you have a history of paying your debts. Foreclosures, bankruptcies, repossessions, charge-offs and other situations where you haven’t paid off the full amount will be noted.

Business experience: Having worked in the same industry as the business you want to purchase is helpful. Related education can also be viewed as a positive.

Other businesses you’ve owned

Having a track record of operating other successful businesses can have a positive influence on lenders when it comes to buying a new operation.

Record of generating revenue: Business financial statements can help a lender document that your current or past businesses were well-managed and turned a profit.

Positive credit record: Lenders review business credit scores and reports to verify creditworthiness and to identify liens, foreclosures, bankruptcies and late payments associated with your other businesses.

The business you want to buy

Just because a business is operating doesn’t mean it’s a good investment. Lenders will ask for documentation, often provided by the current owner, to assess the health of the operation.

Value of the business: Like you, your lender will want to ensure that you’re buying a business that has value and that you’re paying a fair price.

Past-due debts: Lenders will be interested in the business’s past-due debts, which may include liens, various types of taxes, utility bills and collection accounts.

Documentation

Most lenders will let you know what they want included in the loan application package, but there are some personal documents that are typically requested, as well as ones related to the business you want to purchase.

Personal documents

The following documents are used to evaluate your personal finances, business history and plans for operating the business after its purchase:

  • Personal tax returns.

  • Personal bank statements.

  • Financial statements for any of your other businesses.

  • Letter of intent.

Business documents

Documents from the current business owner will also be evaluated. Some common ones requested by lenders include:

  • Business tax returns.

  • Profit and loss, or P&L, statements.

  • Business balance sheet.

  • Proposed bill of sale.

  • Asking price for inventory, machinery, equipment, furniture and other items included in the sale.

Where to get a loan to buy a business

Compared with finding a loan to start a business, getting funding to buy an existing business may be easier. Here are three popular funding options to check into for a business loan:

Bank loans

Banks generally offer the lowest interest rates and best terms for business loans. To qualify for this type of loan, you’ll typically need a strong credit history, plus the existing business will need to be in operation for a certain minimum of years and generate a minimum annual revenue amount set by the lender.

SBA loans

If borrowers don’t qualify for a traditional bank loan, then SBA loans, ones partially guaranteed by the Small Business Administration, may be the next option to explore. Because there is less risk to the lender, these loans can be easier to qualify for. Banks and credit unions frequently offer SBA loans in addition to traditional bank loans.

Online business loans

Another option to consider is online business loans. Online business loans may offer more flexibility when it comes to qualification, compared with bank and SBA loans. Minimum credit score requirements can be as low as 600, and in a few cases lower. Generally, interest rates are higher than what’s available with a traditional bank loan.

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Accounts Receivable Financing: Best Options, How It Works

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Accounts receivable financing, also known as invoice financing, allows businesses to borrow capital against the value of their accounts receivable — in other words, their unpaid invoices. A lender advances a portion of the business’s outstanding invoices, in the form of a loan or line of credit, and the invoices serve as collateral on the financing.

Accounts receivable, or AR, financing can be a good option if you need funding fast for situations such as covering cash flow gaps or paying for short-term expenses. Because AR financing is self-securing, it can also be a good choice if you can’t qualify for other small-business loans.

Here’s what you need to know about how accounts receivable financing works and some of the best options for small businesses.

How Much Do You Need?

with Fundera by NerdWallet

How does accounts receivable financing work?

With accounts receivable financing, a lender advances you a percentage of the value of your receivables, potentially as much as 90%. When a customer pays their invoice, you receive the remaining percentage, minus the lender’s fees.

Accounts receivable financing fees are typically charged as a flat percentage of the invoice value, and generally range from 1% to 5%. The amount you pay in fees is based on how long it takes your customer to pay their invoice.

Here’s a breakdown of how the process works:

  1. You apply for and receive financing. Say you decide to finance a $50,000 invoice with 60-day repayment terms. You apply for accounts receivable financing and the lender approves you for an advance of 80% ($40,000).

  2. You use the funds and the lender charges fees. After receiving the financing, you use it to pay for business expenses. During this time, the lender charges a 3% fee for each week it takes your customer to pay the invoice.

  3. You collect payment from your customer. Your customer pays their invoice after three weeks. You owe the lender a $4,500 fee: 3% of the total invoice amount of $50,000 ($1,500) for each week.

  4. You repay the lender. Now that your customer has paid you, you’ll keep $5,500 and repay the lender the original advance amount, plus fees, $44,500. You paid a total of $4,500 in fees, which calculates to an approximate annual percentage rate of 65.7%.

Because accounts receivable financing companies don’t charge traditional interest, it’s important to calculate your fees into an APR to understand the true cost of borrowing. APRs on accounts receivable financing can reach as high as 79%.

Accounts receivable financing vs. factoring

Accounts receivable financing is often confused with accounts receivable factoring, which is also referred to as invoice factoring. Although AR financing and factoring are similar, there are differences.

With invoice factoring, you sell your outstanding receivables to a factoring company at a discount. The factoring company pays you a percentage of the invoice’s value, then collects payment directly from your customer. When your customer pays, the factoring company gives you the rest of the money you’re owed, minus its fees.

With accounts receivable financing, on the other hand, your invoices serve as collateral on your financing. You retain control of your receivables at all times and collect repayment from your customers. After your customer has paid their invoice, you repay what you borrowed from the lender, plus the agreed-upon fees.

Invoice factoring can be a good financing option if you don’t mind giving up control of your invoices and you can trust a factoring company to professionally collect customer payments. If you’d rather maintain control of your invoices and work directly with your customers, AR financing is likely a better option.

Best accounts receivable financing options

Accounts receivable financing is usually offered by online lenders and fintech companies, many of which specialize in this type of business funding. Certain banks offer AR financing as well.

If you’re looking for a place to start your search, here are a few of the best accounts receivable financing companies to consider.

altLINE

A division of the Southern Bank Company, altLINE is a lender that specializes in AR financing. AltLINE offers both accounts receivable financing and invoice factoring, working with small businesses in a variety of industries, including startups and those that can’t qualify for traditional loans.

AltLINE offers advances of up to 90% of the value of your invoices with fees starting at 0.50%. To get a free quote from altLINE, call a representative or fill out a brief application on the lender’s website. If you apply online, a representative will contact you within 24 hours.

AltLINE’s website also contains a range of articles for small-business owners, covering AR and invoice financing, payroll funding, cash flow management and more. AltLINE is accredited by the Better Business Bureau and is rated 4.7 out of 5 stars on Trustpilot.

1st Commercial Credit

1st Commercial Credit offers accounts receivable financing in addition to other forms of asset-based lending, such as invoice factoring, equipment financing and purchase order financing. The company works with small and medium-sized businesses, including startups and businesses with bad credit.

With 1st Commercial Credit, you can finance $10,000 to $10 million in receivables with fees ranging from 0.69% to 1.59%. You can start the application process by calling a sales representative or filling out a free quote form on the company’s website. After your application is approved, it typically takes three to five business days to set up your account, then you can receive funds within 24 hours.

1st Commercial Credit is accredited by the Better Business Bureau and has an A+ rating.

Porter Capital

Porter Capital is an alternative lender specializing in invoice factoring and accounts receivable financing. The company also has a special division, Porter Freight Funding, which is dedicated to working with businesses in the transportation industry.

With Porter Capital, you can receive an advance of 70% to 90% of your receivables and work with an account manager to customize a financing agreement that’s unique to your business. Porter funds startups and established businesses, offering fees as low as 0.75% monthly.

You can provide basic information about your business to get a free quote and receive funding in as little as 24 hours. Although Porter Capital isn’t accredited by the Better Business Bureau, it does have an A+ rating; the company also has 3.7 out of 5 stars on Trustpilot.

Additional options

Although AR financing and factoring are distinct, many companies blur the lines between the two. As you compare options, make sure you understand the type of financing a lender offers.

If you decide that invoice factoring may be a fit for your business, you might consider companies like FundThrough, Triumph Business Capital or RTS Financial.

Find and compare small-business loans

If accounts receivable financing isn’t right for you, check out NerdWallet’s list of the best small-business loans for business owners.

Our recommendations are based on the market scope and track record of lenders, the needs of business owners, and an analysis of rates and other factors, so you can make the right financing decision.

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Finance & Accounting

SBA Loan Collateral vs. Guarantee: What’s the Difference?

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Personal guarantees and collateral are both ways of promising a lender that you’ll make good on your debt. You may have to offer both to get an SBA loan.

Collateral ties a loan to a specific asset, like your business’s inventory or your home, which the lender can seize if your business can’t repay the loan. A personal guarantee promises the lender that you will repay the debt using your personal assets, but may not specify how.

In general, SBA lenders require anyone who owns 20% or more of a business to provide a personal guarantee. SBA loans larger than $25,000 usually require collateral, too.

Do SBA loans require a personal guarantee?

SBA loans usually require unlimited personal guarantees from anyone who owns more than 20% of a business. Lenders may ask for limited or unlimited personal guarantees from other business owners, too.

Unlimited personal guarantee: This is a promise that the guarantor (the business owner) will pay back the loan in full if the business is unable to. The lender doesn’t have to seize collateral or seek payment from any other source before going straight to the loan applicant for loan repayment.

Limited personal guarantee: If you own less than 20% of a business, you may have the option to sign a limited personal guarantee instead. The limited personal guarantee caps the amount you’ll have to pay the lender, either as a dollar limit or a percentage of the debt.

Limited personal guarantees can be secured by collateral, which means the lender will seize those assets when they recoup payment instead of asking you to pay back a certain dollar amount.

Who has to personally guarantee an SBA loan?

The SBA requires personal guarantees from:

  • Individuals who own more than 20% of a business.

  • Spouses who own 5% more of the business, if their combined ownership interest is 20% or more.

  • Trusts, if the trust owns 20% or more of the business.

  • Trustors, if a revocable trust owns 20% or more of the business.

SBA lenders may require additional personal guarantees.

Do SBA loans require collateral?

For SBA 7(a) loans of between $25,000 and $350,000, SBA lenders have to follow collateral policies that are similar to the procedures they’ve established for non-SBA loans. Banks and credit unions are usually the intermediary lenders for SBA 7(a) loans.

If you use an SBA loan to finance specific assets, like an equipment purchase, the lender will take a lien on those assets as collateral. The lender may also use your business’s other fixed assets as collateral, and you may have to offer personal assets, too.

For SBA 7(a) loans larger than $350,000, SBA lenders need collateral worth as much as the loan. The lender will start with your business assets. If they need more collateral, the SBA requires them to turn to the real estate you own personally, as long as you have at least 25% equity in the property.

Live Oak Bank is the largest SBA 7(a) lender in the U.S. by volume. Its loans may require collateral in the form of:

  • Personal residences.

  • Retirement accounts.

  • Commercial real estate.

  • Equipment.

  • Commercial vehicles.

  • Accounts receivable.

  • Inventory.

What if I can’t provide collateral or a personal guarantee?

If you’re seeking any type of SBA loan, there’s a good chance you’ll have to provide both collateral and a personal guarantee. Even SBA microloans usually require collateral and a personal guarantee. Without them, you’ll have trouble getting an SBA loan.

Some online lenders offer unsecured business loans, which don’t require collateral. But you may still have to sign a personal guarantee.

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