Bridge Loan

Commercial bridge loans act as a conduit by helping the business bridge the gap between meeting current financial obligations and securing a permanent source of financing, at a later date.

Bridge loans are generally meant for short periods of time, since their intention is to help the company fulfill its financial obligations before another viable source of commercial financing becomes available. These loans are also known as swing loans or interim loans.

The lender of a commercial bridge loan generally insists on clarity as far as 'exit strategy' is concerned. Exit strategy is the means by which a lender can hope to recover the amount of money lent. The absence of an exit strategy will disqualify a borrower from obtaining a loan. Bridge loans also carry a higher rate of interest than permanent loans. Generally the borrower would need to pay 3 to 4% more as interest on a bridge loan as compared to a permanent loan. Commercial bridge loans typically carry no prepayment penalty.

Eligibility for a Commercial Bridge Loan

• The borrower needs to provide the lender with a clear exit strategy.
• In case the borrower needs the money for a new venture, he has to convince the lender about the viability and the profitability of the proposed business, by providing details of the expected revenue and cost structure.
• If the money is for an already established business, the borrower would need to present detailed financial statements indicating the profitability and the cash flow situation of the business.
• A loan to value ratio of 70 to 90% would also be required.
• For bridge loans that are secured by the assets of a business, the repayment period is generally 5 years.
• Unsecured commercial bridge loans have a repayment period of 6 months.
• A good debt service ratio (net operating income to total debt service) is also desirable.

Depending on the needs of the business the following types of commercial bridge loans are available:

Types of Commercial Bridge Loans

Commercial Property Bridge Loans/Mortgage Bridge Business Loans: These loans are typically borrowed for the purpose of buying a new property. Many a times, a businessman may be interested in new property and would like to close the deal at the earliest. The new purchase would be financed by selling off the old property. However, the latter deal would take a few months to finalize.

Bridge loans became popular because most lenders were unwilling to provide a loan in order to finance a new purchase when the old property was up for sale. Commercial bridge loan providers may not expect interest payments for a few months. Bridge loans are provided for a period of 6 months to 1 year, although most lenders may allow the borrower to extend the period of the loan for up to 1 year by paying an additional fee.

Commercial Construction Bridge Loans: This is a type of construction loan meant for the purpose of providing temporary finance for a new construction, or for making improvements on an already existing structure, in order to enhance the available cash flow from the property.

Fractured Condo Scenario: Some bridge loan providers may be willing to provide loans in case of fractured condos. Generally, a builder constructs an apartment complex with an intention to sell the apartments. Sometimes, due to the unavailability of buyers, the builder is forced to rent out most of the apartments. Such a condominium complex is known as a 'fractured condo'.

Since the builder's ultimate intention is to sell the condos, he might approach a lender in order to obtain temporary financing in the form of bridge loans. Of course, the lender charges a very high rate of interest due to the extent of risk involved.

America’s Recovery Capital Loans (ARC Loans): Since 16th June 2009, the US Small Business Administration (SBA) has started accepting applications from small business enterprises for bridge loans. These loans are meant for well established companies, which were profitable before the start of the recession.

Recession might have resulted in reducing their customer base, working capital, and employees. Loss of ability to restructure existing debts, increase in costs, and reduction in suppliers, will also qualify the firms for bridge loans, since the aforesaid issues would negatively impact the ability of a business to tide over difficult times.

Commercial bridge loans are generally paid off by opting for a permanent source of financing. In case of commercial property bridge loans, the sale of the old property may help repay the bridge loans. Bridge loans are only available for firms which have a good operating history, or new firms engaged in highly profitable projects. Delinquencies will definitely disqualify firms from obtaining commercial loans.

This is especially true for companies desiring commercial bridge loans. Such firms might be forced to opt for 'hard money financing' which carries a very high rate of interest. The credit worthiness of a borrower is inconsequential in case of such loans. These 'last resort' loans, which are secured by the value of the property, have a loan to value ratio of 50%.

SBA 504 loans

SBA 504 loans are tailor-made for business owners who want to acquire or develop their own facilities. Forget everything you’ve ever heard about the U.S. Small Business Administration (SBA). Wipe the slate clean. The negative connotations may have been warranted in the past, but the SBA is different these days. It’s no longer a four-letter word.

And like many things in our modern, technology-laden world, even the SBA has become user-friendly. The SBA is worth every penny of its more than $24 billion budget on the basis of a single program alone: the SBA 504 Loan Program for small business owners who want to acquire or develop their own facilities.



Lots of entrepreneurs -- and far too many bankers, ironically -- dismiss the SBA on the basis of its 7(a) lending program that always seems to be in a crisis needing supplemental appropriations. The 7(a)’s reputation may or may not be deserved, but some of its negativity has managed to soil other effective and lesser-known SBA programs.

SBA 504 loans, by contrast, are a dynamo. They work; they work well; and unfortunately with some of the historical problems in the SBA’s 7(a) program, a dark shadow has hung over 504 loans for too long making many people unaware of their virtues. In fact, for some time now, I have heard many otherwise knowledgeable lenders ignore 504 loans based on faulty and out-dated information.

Entrepreneurs, real estate brokers, accountants and franchisors are gradually waking up to the fact that 504 loans were designed to level the playing field for small business people in the marketplace. With 90% loan-to-cost financing of most commercial real estate projects (inclusive of land/existing building, hard construction, FF&E, plus soft and closing costs), 504 loans are very powerful.

Borrowers with 504 loans get long-term, below-market, fixed-rate financing at better terms than are available from any private sector lender. That’s correct -- you didn’t read that wrong -- SBA 504 loans for commercial property offer the least expensive money available to most small business people. For most of the past 3 years (2004 to 2006), the SBA bond rate (which usually makes up 40% of the total project costs or 44% of the actual loan amount) has hovered near 6% fixed for twenty years.

Loan terms on the first mortgage portion (usually 50% of the total project costs or 56% of the actual loan amount) are usually 25 years with no balloon payments and loan fees more inline with conventional lending than with other SBA programs. And if all of that wasn’t good enough, borrowers generally put a third to half as much money down for 504 loans (usually only 10% of the total project costs), thus enabling them to grow their businesses much faster while getting the highest cash-on-cash return for their new real estate investment.

Last year, 504 loans helped fuel about $14 billion in total capital investments for 9,720 small businesses throughout the U.S. These loans also helped create about 112,000 new jobs through reinvestment of the "equity savings" small business owners experienced. In addition to helping create jobs, the 504 loan program is about capital preservation and cash-flow sensitive lending -- it enables smaller business owners grow their business more quickly than they otherwise could.

SBA 504 loans rank as one of the most effective domestic economic development programs the federal government oversees with its funding having grown about 22 percent a year since 2000. So far, every qualified 504 loan proposal my company has submitted to the SBA has been approved and funded, or is about to be funded. The notorious SBA hiccups of the past have been banished through their own process improvements and the emergence of specialists.

Lending amounts for 504 loans are generally not capped or limited and only non-public, for-profit businesses qualify. Three financial qualifications, however, set some limits as to who can get a new 504 loan: the borrower’s small business must have a tangible business net worth under $7 million; the operating company’s net income for the previous two years must average less than $2.5 million annually; and the borrower(s)/guarantor(s) cannot have liquid, non-retirement assets greater than the total project amount to be financed.

Despite these restrictions, the field of qualified businesses is not as limited as one would think. In fact, over 98 percent of all businesses in Florida, for example, qualify for SBA 504 loans based on the criteria just mentioned – a similar percentage applies nationwide as well.

So what sorts of businesses make the most appropriate SBA 504 loan candidates? We see an extraordinary number of service professionals (physicians, attorneys, accountants, and so forth). But in truth, any business owners with a track record, a franchising license or at least some solid personal experience in their particular (or a similar) industry is an appropriate SBA 504 loan candidate. The 504 loan program collateral requirements are generally limited to the commercial real estate facility that the loan finances (unlike with other SBA programs), and approvals and closings happen in days and weeks, not in multiple-months as it was last century.

Historically, the SBA has usually been considered a lender of last resort. But compared to ordinary financing for free-standing commercial property, 504 loan terms and conditions are so good that almost every small business owner should select an SBA 504 loan as their top choice. The secret’s out: now you know what is truly the savviest program offered by the SBA. Pass it on.

Disapprovals Of Commercial Loan Applications

This article highlights the five primary reasons that banks decline commercial loan applications. The reasons provided below do not represent obscure issues, so it is likely that two or three of the reasons described will be important for typical commercial loan situations.

The first two reasons (business plans and tax returns) will potentially impact all commercial borrowers. Many commercial loan officers will start their loan review process by stating some variation of "Can you show me your business plan?" and "We will need to see several years of tax returns."



Commercial projects are frequently too unique for traditional commercial banks. In these situations (even if a commercial borrower has favorable tax returns and an adequate business plan), it is not unusual for commercial borrowers to be declined for a commercial loan by a traditional commercial lender. Commercial borrowers are likely to be confused when they are turned down and will be unsure as to why it happened and what to do next. For each of the five major reasons that a bank might decline a commercial loan, a practical strategy is provided for converting the declined commercial loan into an approved commercial loan.

REASON # 1 FOR COMMERCIAL LOAN REJECTIONS

A bank's loan officer or loan underwriter is not satisfied that the business plan provided by the commercial borrower supports the requested loan.

STRATEGY # 1 FOR CONVERTING THE DECLINED COMMERCIAL LOAN INTO AN APPROVED COMMERCIAL LOAN

Most commercial borrowers will benefit directly from dealing with a commercial lender that does not require a business plan due to the following major benefits:

(1) Reduce commercial loan costs by thousands of dollars. A common range for an average business plan (prepared to typical bank specifications) is $5,000 to $10,000.

(2) Reduce commercial loan closing time by several months. Business plans can be prepared before or after applying for a commercial loan, but either way the net extra time required will probably be 1-2 months or more.

(3) If the lender does not require a business plan, there is one less item standing between the commercial borrower and their approved loan.

REASON # 2 FOR COMMERCIAL LOAN REJECTIONS

Loan underwriters find something on a tax return that disqualifies a borrower under the bank's lending guidelines. This "something" will frequently be insufficient net income, but when loan underwriters look at tax returns, there are many other possibilities which produce a similar result.

STRATEGY # 2 FOR CONVERTING THE DECLINED COMMERCIAL LOAN INTO AN APPROVED COMMERCIAL LOAN

Business loan borrowers will never have Reason Number 2 to worry about if they are applying for a "Stated Income" commercial loan. Very few traditional banks use Stated Income (no tax returns, no income verification, no IRS Form 4506) for a commercial loan. Commercial borrowers should seek out lenders using Stated Income commercial loans. However, this strategy will not work for all commercial loans since there is a maximum loan amount of $2-3 million for most Stated Income commercial mortgage loan programs.

REASON # 3 FOR COMMERCIAL LOAN REJECTIONS

The bank does not generally make business loans for the type of business involved or imposes special requirements that make the commercial loan impractical for the commercial borrower. Fewer banks are making loans to bar/restaurant properties. Similarly, auto service businesses are frequently given unnecessary (and expensive) environmental reporting requirements. There are many "special purpose" properties such as funeral homes, campgrounds and churches that most traditional banks will not include in their business lending portfolio.

STRATEGY # 3 FOR CONVERTING THE DECLINED COMMERCIAL LOAN INTO AN APPROVED COMMERCIAL LOAN

For most business borrowers that can get approved at a traditional bank, there are prudent options available elsewhere. And "prudent options" are clearly available only elsewhere when the bank won't make the business loan in the first place! There are very capable commercial lenders that are interested in special purpose properties.

REASON # 4 FOR COMMERCIAL LOAN REJECTIONS

When a business is refinancing their current commercial mortgage and wants to get a significant amount of cash out for various uses, it is not unusual for the bank to restrict what the funds are used for and to limit the amount of cash to amounts as small as $100,000. Even though the bank might make the commercial loan, if they won't provide the amount of cash needed by the commercial borrower, this is equivalent to declining the loan.

STRATEGY # 4 FOR CONVERTING THE DECLINED COMMERCIAL LOAN INTO AN APPROVED COMMERCIAL LOAN

As mentioned in Strategy Number 3, there are other options available elsewhere! The commercial borrower's mission (and it is not impossible at all) is to use a commercial real estate lender that will allow them to get much larger amounts of unrestricted cash out of a commercial refinancing without restrictions on what they do with it.

REASON # 5 FOR COMMERCIAL LOAN REJECTIONS

The bank will not provide a commercial loan without adequate collateral, usually in the form of a lien on personal assets such as the commercial borrower's home.

STRATEGY # 5 FOR CONVERTING THE DECLINED COMMERCIAL LOAN INTO AN APPROVED COMMERCIAL LOAN

Commercial mortgage borrowers should seek out lenders that do not "cross collateralize" assets as a condition for obtaining a commercial loan. This will provide greater flexibility for the commercial borrower and avoid unnecessary (and unwise) connections between personal and business assets.

Commercial Loan Information

There is a large need these days for commercial lending and can be quite overwhelming. I If you are looking into applying for a commercial loan you may want to inquire a little about the subject before you speak to a commercial lender. I If you prepare yourself in advance, then you will know what will be expected of you before you apply for a loan. A commercial lender is advantageous and they will be able to answer any questions you may have.



If there is a business that wishes to expand, improve or perhaps pull out some equity in their real estate, commercial loans are very helpful to obtain this goal. I Also, anyone who has a business or a starting up business can request for a commercial mortgage. I Keep in mind that a commercial loan and a personal loan are different from one another. I Business loans are not backed up by the government; and these lenders are unwilling to take a risk with some business loans, this is why the interest rate is higher than that of a personal home loan.

Depending what the total amount you plan on getting a loan for, will determine which lender you will most likely work with moving forward. I This will be determined on what your wants and needs are for the loan. I If a smaller organization that plans to borrow less than about $2 Million, then a local bank will be a good way to go when needing a loan. I You can also find online, non-bank direct commercial lenders. I If you choose an online lender, you need to remember that you will not get the individual interaction, as you would with a local bank. However, the terms and conditions of your application will be lenient.

Whether you work with a local bank or a direct commercial lender, you will want to have all of your paperwork completed and ready. I So the lender can help you correctly, be sure that you are very clear with what you are wanting from this loan. Check lists of business expenses you will need to have for yourself are; profit & loss statements, and balance sheets, operating statements, etc. I Along with your application, the commercial lender will also need your pay stubs from the at least the past two years and personal and business income tax returns.

Along with the necessary documents they want you to fill out, be sure to have some collateral lined up if you want the lender to know that you are serious in applying for the loan. I

Credit scores are also important to a commercial lender. I Before applying, take advantage of the free credit report companies. I If at all possible, commercial lenders are looking at your debt to income ratio less than 40%. I If it is higher than 40%, you might want to look into seeing a non-bank lender who could be more willing to help you out.

The process and approval from a local bank commercial loan might take a long time with your application. I If you are unable to wait that process out, you can try and get a faster loan by working to get pre-qualified with an online non-bank commercial lender. Online non-bank lenders can possibly qualify you a bit faster than a normal local bank. Either way, make sure you have all of your documents completed so the process for the loan will be easier for you.

Commercial Real Estate Loans

Getting commercial real estate loans approved is almost always complex and frequently difficult. Business borrowers need to realize that there are several situations with commercial real estate loans which can be especially difficult to get approved.

Examples of eight difficult loan scenarios are described to illustrate two key points: (1) difficulties with commercial real estate loans are not uncommon; and (2) difficulties with commercial real estate loans can be overcome in most cases.



A commercial loan that needs to be closed in 60 days or less.

It is not unusual to discover that a traditional lender considers six to nine months "normal" for commercial loan underwriting. Obviously this will act as a severe constraint if a commercial borrower is trying to buy a property that the seller wants to close in two to three months. If quick funding is essential, the commercial borrower should contact a non-bank business lender where most commercial real estate loans will close in 45 to 55 days.


A commercial loan that won't work without long-term financing.

What is long-term financing for a commercial loan? Some commercial lenders view 3-5 years as the longest period before a commercial loan will be subject to a balloon payment. If that sounds short-term instead of long-term, most non-bank business lenders can arrange 25-year to 40-year commercial real estate loans for commercial properties. Longer-term financing will often be the critical difference that facilitates a successful business investment (especially because mortgage payments will be reduced dramatically).

Providing financial data to a commercial lender after the loan is closed.

Some commercial real estate loans will have covenants stipulating that the lender must receive financial data even after the loan closing and that the loan can be recalled (forcing the borrower to repay early) if the audit of this data is not satisfactory to the lender. In stark contrast to this, commercial real estate loans via non-bank commercial lenders based on Stated Income will not require business plans or income verification either before or after the loan is closed.

Borrower is self-employed or income is paid on a commission, bonus or incentive basis that is somewhat erratic and difficult to document properly.

Non-bank commercial lenders using a Stated Income business loan program will not require tax returns or any income verification. They also will not require commercial borrowers to sign IRS Form 4506 (which authorizes the lender to obtain tax returns directly from the IRS), a form routinely required by many commercial lenders.

A borrower wants to refinance a commercial property and use $500,000 to $1 million from the proceeds to buy another property.

Most commercial lenders will restrict the maximum cash that can be taken out of a refinancing, with a normal limit of $100,000 to $250,000. It is also not uncommon to encounter restrictions on the use of the cash. With a commercial loan via most non-bank commercial lenders, the commercial borrower could receive unrestricted cash up to one million dollars and use the proceeds without restrictions.

DIFFICULT COMMERCIAL REAL ESTATE LOANS SITUATION NUMBER 6:
A borrower wants to use a substantial amount of subordinated debt (a seller second or other secondary financing) to reduce the amount of cash needed to purchase a commercial property.

Many commercial real estate loans will not permit a seller second or other forms of subordinated debt. With a commercial loan via most non-bank business lenders, a commercial borrower can obtain Combined-Loan-to-Value [CLTV] ratios up to 95% with subordinate financing (including seller seconds).

DIFFICULT COMMERCIAL REAL ESTATE LOANS SITUATION NUMBER 7:
Sourcing and Seasoning of assets or ownership.

For a purchase, commercial lenders will frequently want documentation about where the down payment is coming from (the source, so having limitations about where the funds are coming from is called sourcing). Commercial lenders will frequently have requirements stipulating that the down payment funds must have been in a specific account for a specific period of time, often 3-6 months or longer (this is called seasoning because it is tantamount to requiring that the funds have matured by being in the same place for a while).

Seasoning of ownership is similar to seasoning of funds, except this requirement involves the minimum time someone has owned a commercial property before they can refinance the property. Most non-bank commercial lenders do not have any requirements or limitations involving either sourcing/seasoning of funds or seasoning of ownership.

A borrower needs a $100,000 commercial loan.

What's difficult about this situation? Many/most commercial lenders will have much higher minimum amounts for commercial real estate loans ($250,000 to $350,000 is not uncommon). At most non-bank business lenders, the minimum commercial real estate loan is $100,000.