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.