While bridge lending was first developed for the housing market, businesses large and small are now seeing benefits from bridge and other forms of “hard money” financing. If you find yourself in need of fast cash to meet a business obligation, purchase a new investment or owner/operator property or to keep operations moving smoothly, a bridge or hard money loan might be the answer you’re looking for.
Let’s explore the options, applications, successes and risks of bridge and hard money financing to see how these loans help many businesses act on high value or limited time opportunities in challenging markets.
What are Bridge and Hard Money Financing?
All hard money loans are bridge loans. In fact, you may see them referred to as short-term bridge loans. Not all bridge loans are hard money loans, however.
They’re both short-term financing options. In many cases, borrowers are able to make interest-only payments during the term of the loan. When the term ends, many loans conclude with a “balloon” payment, a one-time fee that covers the entire principal and any remaining interest. Some businesses choose to pay this in cash, while others seek refinancing into a long-term financing option.
Hard money loans are guaranteed by collateral (named “hard money” because the “hard” or physical assets provide security and reduce risk for the lender). Bridge loans that aren’t also hard money loans usually rely on the financial position of the borrower.
What can You Use a Bridge or Hard Money Loan For?
It can be challenging to picture when you might want to use a bridge or hard money loan, so here are a few scenarios:
Let’s say you own one building. You can take a loan against it to purchase a new building, sell the old building to repay the loan and roll any remaining balance into long-term financing.
In another scenario, let’s say you own one building. It might be office space or a multi-family rental property. You can leverage it to buy a new building quickly. When you do this, you can close the loan fast and then access the revenue stream from the new property at the time of close. You can then refinance the remaining balance on the loan as the balloon payment approaches.
Now, imagine you have a customer who wants to place a high-value order. That’s great until you realize that it’s outside of your buying capacity. A hard money loan will let you leverage the value of equipment or property you already own for a short time. Then, you can submit a purchase order for what you need to serve the customer. When the client pays you, you can pay off the balance and close out the loan.
Bridge and hard money loans can be exceptionally beneficial for marginal revenue after reaching your break-even point for the year because any additional income is simply money in your pocket.
These loans can also provide you with working capital. For example, when you need to fulfill contracts or hire salespeople to meet client demand, you can take a short-term hard money loan out against your existing assets. You can pay salaries for production or sales teams with the money. In this circumstance, it’s important to realistically consider how much revenue your activities are going to generate. The income from production or sales must repay the balloon payment as well as interest during the term.
Are There any Potential Pitfalls?
As with any loan, there are potential risks involved in bridge and hard money financing.
If you try to refinance your remaining balance when the loan term ends but aren’t able to because of changes in lending terms or interest rates, your business may end up with a bill it’s unable to cover. If that happens to you, contact a loan broker to help you find a nontraditional financing option that will work for you.
Sometimes, client payments fall through. If a customer doesn’t pay an invoice, you might not have the funds to repay a loan you took out to cover a purchase order.
The real estate market is unpredictable at the best of times. If you were counting on the sale of a property to pay off a loan, you could run into trouble if it stays on the market for longer than you were expecting or sells for less than you needed it to.
Evaluating risk and the likelihood of success is a critical part of the picture.
When you work with our experienced loan brokers, we can advise you on all of your options, along with the risks and benefits associated with bridge and hard money financing.
If it’s not right for you — and there’s always a chance it won’t be — we can help you identify alternative paths to the funding you need to help your business thrive. Reach out to us today to get started.