When entering the commercial real estate business, exploring the various financing options available is one of the most basic and essential things for you to do.
For real estate investors, there is a financing tool that can be very beneficial for renovating homes and loan refinancing. It is called the bridge loan, and it is great because it brings flexibility and speed to your investment. It also ensures you grow your portfolio faster and quicker than any type of financing.
This article will explore the bridge loan use case and how to maximize its effectiveness for your investment portfolio.
Bridge Loan Use Cases
There are various scenarios where the use of a bridge loan makes sense. Here are some common reasons why you can use a bridge loan:
To Invest in a Time-Sensitive Commercial Real Estate Deal
your portfolio. However, these deals are usually timely, and many savvy competitors tussle to secure them.
This scenario makes the use of a bridge loan ideal. With a commercial real estate deal, you can apply for a bridge loan and make the purchase immediately. That way, you don’t have to wait long to find a suitable loan and miss out on the real estate opportunity.
This use case is typical among investors who use bridge loans to invest in time-sensitive deals and, in turn, make a truckload of money.
To Invest in Fix-And-Flip Properties
Another type of real estate investor who turns towards commercial bridge loans is those who deal with fix-and-flip properties.
Fix-and-flip deals are real estate deals that involve the purchase of almost completed or underdeveloped properties. Investors then repair and renovate them and sell them off at higher prices.
Many real estate investors have become successful just by doing that. They are always on the lookout for properties that have the potential to generate revenue once they are polished and have minimal or no repairs.
In this case, fix and flip investors find short-term loans, such as bridge loans, that can be quickly paid off. They can be easily financed, and proceeds can be used to make the property, which is now sold for a higher price.
Once the sale is executed, the bridge loan liabilities can be paid off immediately, and there is no fear of carrying them forward for years to come.
To Cover Payroll and Operational Needs
Many businesses get stuck because they need more operational funds to run their day-to-day activities and stay afloat. In such cases, many businesses will either consider shutting down or keeping on until considerable capital comes their way.
Businesses can consider taking a bridge loan to overcome the issues caused by a lack of cash flow. It also takes a little time to get approved and can keep the business afloat until the big deal finally comes.
To Purchase Non-Perishable Goods in Bulk at Discounted Rates
Regardless of the kind of business you are running, you will need to stack up your goods at one point or another. Sometimes, it can happen that your leading distributor is liquidating his inventory and giving it out at a discounted price. In this case, you will need to jump on the discount and make that purchase before other competitors will.
However, you’ll need a truckload of cash to purchase the goods. That’s where bridge loans come in. Using a bridge loan to seize the opportunity to buy goods in bulk and at discounted rates is an excellent and timely choice. Once you are able to purchase the goods, you can pay off your commercial bridge loan.
To Purchase Your Dream Home
Imagine you’ve found the perfect home and encounter problems such as not being able to sell your old property quickly enough to buy a new one. The buyer of your old property can also drop out at the last minute. Problems like these can be disheartening, and if you don’t want to lose your new place, a bridge loan can be the answer.
It is a perfect loan for “bridging” the gap between buying a house and getting the funds from your old property. A bridge loan can also last 12 months, giving you a decent amount of time to sell your old property and repay the debt.
They are also pretty flexible, so once the sale of your property goes through, you can use the money raised to pay part of your loan. You could then fully pay it off once another funding comes through.
To Pay Another Bridge Loan
If a bridge loan is almost due and your lender is unwilling to extend the deadline, you can get another bridge loan to pay it off. As a result of the pandemic, many people are finding it difficult to pay their debts back.
If you have been unsuccessful with a bridge loan refinancing, you might need to get a hard money loan and sort out your debts as quickly as possible.
To Transition Your Business
If you have been looking to transition to another business or industry, you can use a bridge loan to get the necessary goods. After you and your partner have decided on the business terms, use the equity in your property to secure a loan.
To Launch a New Business or Product
If you don’t have enough cash to start a new business, you can consider a bridge loan. The loan can be used to purchase equipment, supplies, and office space.
You can also get a bridge loan to launch a new product. It can help you cover the expenses associated with the product, such as marketing costs and new hires. The revenue from the business or product can be used to pay the loan at the due date, usually between 6 and 12 months.
How to Qualify for a Bridge Loan
When looking to get a bridge loan, it is essential to ask the right questions to understand the terms, costs, interest rates, and eligibility. Here are a few things to look out for to qualify for one:
Recent Financial Statements
Ensure your financial statements cover the essentials, including cash flow, balance sheet, income statement, and statement of equity. These documents must be accurate and up-to-date and reflect the current state of your startup.
Projections and Assumptions
Apart from your financial statements, lenders also require a comprehensive overview of your business’s financial health. This includes a detailed breakdown of your expenses, revenue, and future financial projections. Providing realistic and achievable projections backed by sound reasoning and thorough market research is crucial.
Clearly outline your assumptions and methodology, and be prepared to explain the rationale behind your projections. This demonstrates your financial acumen and ability to make informed decisions that drive business growth.
Traction and Metrics
You’ll need to prove that your business is progressing by showing user growth, new partnerships, conversion rates, and other indicators. These aspects show that you effectively carry out your plans toward your future projections.
Fundraising Materials
Review and refine your fundraising materials from past funding rounds, including pitch decks and executive summaries. By sharing these documents with the lender, you can demonstrate your experience and proficiency in securing funding.
This showcase of your fundraising prowess will enable the lender to gain confidence in your capacity to secure future funding.
Next Round Funding Details
It is essential to inform your lenders of potential investors’ details, the amount of money raised, and an estimated timeline for finalizing the round.
Personal Guarantee
Lenders ask business owners to provide a personal guarantee to repay the loan if all other guarantees fail. This puts the founder’s assets at risk if his business cannot repay the loan.
Get A Bridge Loan At Capital Max
Now that you understand the different use cases for a bridge loan, you can contact our team at Capital Max to apply for this loan and get approval as soon as possible. If you have questions or need clarification regarding any of the processes for hard money lending, you can also contact us for help.
At Capital Max, we offer expert and honest assistance in bridge loan financing. Our creative and tailored financing solutions are just what you need for your next commercial real estate loan.