You must have heard the news – bridge loans in Commercial Real estate lending are on the rise. If you’re new to the finance industry, bridge loans might seem like an enigma to you. But, don’t worry – even investors with years of experience are confused about what these loans mean and their terms and conditions.
In the following article, we break the term down to help you understand what the rise means for investors and stakeholders alike.
So, what are you waiting for? Jump right into it and learn what bridge loans are and the different types of loans under the category. We will also discuss what the rise in bridge financing means for businesses and investors. Let’s get started and help you understand whether bridge loans are perfect for your business or not.
What Is A Bridge Loan?
Bridge loans are a type of loan that is used by companies as an interim financing option. Generally, companies and individuals who cannot secure permanent finances or need money to solidify their short-term position take out bridge loans.
In some cases, even established companies try securing bridge loans when faced with a financing shortage.
Bridge loans are also taken by companies and individuals for IPOs (initial public offerings). In some cases, it might include an equity-for-capital exchange instead of a loan money. Other than being beneficial to borrowers, bridge loans can also benefit lenders and investors. It is a great way for investors to better their portfolios and boost their profitability.
How Does Bridge Financing Work?
The name bridge financing comes from the concept that it is a loan that helps “bridge” the time between a company running out of its investment/finances and the time when it can expect future investments.
So, the focus of the company is to opt for bridge financing for the short term until working capital is secured again.
With multiple bridge financing loans available in the market, investors can easily arrange investments. However, you must thoroughly research and evaluate all options available before securing funding.
Generally, companies who have a secure position, prefer to check out bridge financing options instead of pushing the company into greater distress. Some common bridge financing options include IPO offerings, debt, and equity.
What Are The Different Types Of Bridge Financing?
Based on the situation and financial condition of the applicant, bridge loans from lenders and financial institutions are easily available. Before you jump into securing a commercial real estate bridge loan, let us look at the different bridge financing options available to help you select the best possible loan based on your needs.
Check out these different bridge financing options available:
Debt Bridge Finance Loans
When comparing the different types of loans available, some companies might determine that it is better to acquire debt. The debt bridge finance loans offer immediate finances and investments to companies until they can secure more permanent options.
So, these types of loans are short-term with interest rates starting at prime rates. However, the rate changes based on the creditworthiness of the borrower and their debt-to-income (DTI) ratio. Generally, lenders only offer Debt Bridge financing options to excellent credit and low DTI ratio borrowers.
A point to note is that the interest rates of bridge loans are significantly higher than the industry’s regular rates of interest. This is a significant point that borrowers need to consider before deciding whether debt finance is the best option for them or not. Sometimes, the interest rates of bridge loans are so high that they can cause further financial struggles.
So, you must be careful and seek a debt bridge finance loan only when necessary. To secure a commercial bridge loan, you must apply for one via your current financial institution or lender.
Equity Bridge Finance Loans
When companies need immediate investment or cash to bring in more inventory or grow their business in some other way, they might be looking for alternatives to high-interest loans.
This is when borrowers must check out private equity bridge financing loans that allow companies and individuals to get investment in exchange for equity in the business. Moreover, borrowers must pay back the investment in full along with an interest that is agreed upon.
However, a point to keep in mind is that this type of investment is only provided if lenders think that the company is likely to become profitable and grow. Also, this type of financing loan is offered by venture capitalists instead of banks, which is why you must reach out to the best possible contacts available.
IPO Bridge Finance Loans
Before we discuss what an IPO bridge loan is about, let us talk about what an IPO is to help you understand what it is all about. An initial public offering or an IPO is a process in which businesses sell the company’s shares to the public via the stock exchange.
Although this process can help companies raise capital, it can be quite expensive and cause a drain on the company’s finances.
This is why a lot of companies look for IPO Bridge financing options to help them complete the process and get their IPOs registered. Other than this, companies must also pay for a few expenses like stock exchange and underwriting fees to be able to register an IPO and seek IPO bridge financing.
Generally, companies that sign up for IPO bridge loans pay it off as soon as their IPO is registered and they get cash from sales.
For IPO bridge loans, borrowers can get in touch with investment banks that offer these loans. In return, companies offer lenders with discounted company shares that help offset the IPO bridge loan.
Similar to other bridge financing loan options, these IPO loans are considered short-term, but you must keep in mind that the IPO process can take anywhere between several months and a year to complete.
Commercial Bridge Finance Loans
When companies need to buy a new investment property before they sell an existing one, they can apply for commercial bridge finance loans. Generally, companies use the property they’re planning to buy as collateral for these loans.
Although, another viable option is to use business inventory or similar assets as collateral for commercial bridge financing options.
A point to keep in mind is that commercial bridge finance loans are very different from regular loans and other loan types available. For example, the interest rates of commercial bridge finance loans are higher than those of a commercial loan or any other type of business loan available.
Some commercial loans available have lower interest rates when the borrower pays the down payment well ahead of time. However, some of these loans have a factor rate which means that the borrower might owe the same interest amount whether they pay it off quickly or within a set time frame.
If you want to apply for a commercial bridge finance loan, you can get in touch with a financial institution, an established bank, or.
Is Bridge Financing On The Rise?
According to an analysis by Revolution Brokers, bridging loans in Q3 of 2022 hit a total of GBP 214.7 million (USD 265.5 million as per 2022’s average conversion rates). This signifies a growth of 20.3% over the quarter, an annual growth of 12.9%, and a rise of 47.6% with the increase in Bank of England’s base rates in Q4 of 2021.
An important point to note is that the interest rate of the Bank of England is set and changes based on the rate of inflation. This means that when inflation rises, the rates of interest do so too making it more expensive to borrow money.
By the end of 2021, the base interest rate increased to 0.25% to solve the economic turmoil ensuing from the COVID-19 pandemic. This has also caused an increase in total bridging lending and a significant increase in the average Loan-to-Value (LTV) ratio.
From these above changes and fluctuations in the rates, it is quite clear that the base rates for home buyers are also on the rise. This is exactly why more and more people are borrowing more money and signing up for bridge loans compared to that during the rise of the pandemic.
But, to know why bridge loans are on the rise, let us look at it in more detail below.
Why Are Bridge Loans On The Rise?
According to the same report released by Revolution Brokers, 22% of all bridging loans taken out by borrowers in Q3 2022 were a result of a broken chain. This rate is about 4% higher than that at the end of 2021 which clearly shows that bridge loans are on the rise. Another factor you must consider is unregulated refinance and it currently makes up for about 13% of all bridging loans. This is an 8% growth as compared to the rate in Q4 2021 which is also a testament to the growth in the number of bridge loans taken out.
Another reason corporations and businesses take out bridging loans is to purchase commercial real estate properties or invest in them. About 16% of all bridging loans are taken out for this purpose and have shown a drop of 13% as compared to Q4 2021.
The reason can be attested to the fact that as both economic uncertainty and the cost of living increase, investors are avoiding spending more money on investing in properties.
Conclusion
It is clear that bridging loans can offer relief to companies looking for urgent financing options. However, the terms and conditions are quite complicated and businesses must thoroughly read through them before investing.
Interested in securing a bridge loan that helps you get ahead in the commercial real estate investment sphere? Get in touch with the industry’s top finance experts and learn more about the financing options available to you!
