Commercial real estate bridge loans

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Page written by Chris Godfrey. Last reviewed on August 29, 2024. Next review due October 1, 2025.

Commercial real estate bridge loans can be your financial lifeline in a real estate or business project. Cover gaps in your working capital until you can refinance with a long-term solution. Never miss a good business opportunity again.

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What is a commercial real estate bridge loan?

Commercial bridge loans are flexible, short term business loans that organizations can use to cover a temporary shortfall in funding. Most often used in real estate transactions, bridge loans can ‘bridge the gap’ between selling one property and buying another, cover construction and renovation costs, help you to complete a project, or pay for business expenses while you wait for a long-term loan to fund.

Unlike many other business loans, bridge loans are only used to cover a shortfall in capital until an alternative financial solution can be obtained. They are not a long-term funding option.

How do commercial bridge loans work?

Commercial bridge loans are most commonly used in real-estate transactions, usually to cover the funding gap when organizations buy real estate and have yet to sell their current property, or while they seek a buyer for the new real estate in a ‘flix and flip’ project. The bridge loan fills the gap between long-term funding solutions, allowing organizations to capitalize on good opportunities or complete projects despite a lack of working capital.

Commercial bridge loans tend to be secured by the borrower’s collateral – typically the real estate being purchased or sold. Lenders will provide a loan based on a percentage of the unencumbered value of the real estate. This is known as ‘loan-to-value’ or LTV. Commercial bridge loans are typically 65% to 80% of LTV and loan duration can range from a few weeks or months up to three years.

Example of commercial bridge loan:

Value of real estate: $100,000
Existing loans on property: $30,000
Unencumbered value: ($100k less $30k): $70,000
Bridge loan LTV: 70% of $70,000
Value of bridge loan: $49,000

Important note: Due to their short-term or ‘emergency’ nature, commercial bridge loans typically have higher interest rates and fees than many other forms of business financing.

What can commercial bridge loans be used for?

Commercial bridge loans are a flexible form of business loan. Use them to:

Cover the financial gap between buying one piece of real estate and selling another

This allows businesses to acquire commercial real estate even though they need the equity in their unsold property to complete the deal. The bridge loan fills the gap until the old property can be sold and the sale proceeds can be invested in the new real estate purchase. The bridge loan is paid off when the new property is funded with a long-term loan, typically a commercial mortgage

Pay for the acquisition and renovation of a ‘fix and flip’ property

Instead of using their own capital to fund the purchase and refurbishment of a property, the developer uses a commercial bridge loan to help buy the real estate and cover the renovation costs. As soon as the property is sold, (flipped), the bridge loan is paid off

Cover the time lag while you wait for a long term financing to fund

It can sometimes take weeks or even months to obtain long-term business financing, during which your working capital may become exhausted. A commercial bridge loan can refill your working capital pool while you wait for your long term loan to fund

Pay for project expenses until your business deal completes

Many business projects require significant investment to get them to their anticipated ROI. A commercial bridge loan can support the project during the development phase, giving you the financial firepower to complete the deal

What are the pros and cons of a commercial real estate bridge loan?

Like almost every form of business financing, commercial real estate bridge loans have their pros and cons:

Pros:

- Cover gaps in working capital – reduce financial stress on your organization
- Capitalize on good business opportunities – never miss a deal again
- Buy and sell real estate with confidence – you know you have the financing covered
- Complete projects on time – there’s no need to wait for additional financing
- Borrow up to 80% of LTV
- Can usually be obtained quickly – subject to appraisal of the real estate collateral

Cons:

- Collateral is essential – few bridge loans are provided unsecured
- Does not cover the entire project cost – you must still provide some capital
- Higher interest rates
- Higher fees
- Short term only – maximum of three years

Where can I get a commercial bridge loan

Commercial bridge loans can be obtained by approaching banks, credit unions and online lenders one by one, or you could use the services of a loan marketplace that will immediately introduce you to a choice of bridge loans from different lenders. Some marketplace platforms can also give you advice and help you with the application process. This can be especially useful for borrowers who have never taken out a commercial real estate bridge loan before.

What should I look for in a bridge loan?

If you are seeking a commercial bridge loan, what should you look for?

High LTV – you want a loan that gives you the biggest bang for the buck. Higher LTV provides more capital to the deal. Some bridge loans will give you up to 80% LTV
Competitive interest rates – although interest rates on bridge loans are typically higher than other business loans, rates do vary. Competitive bridge loan rates start at 11%.
A loan term that covers your needs – there’s no point in taking out a bridge loan that is too short to ensure your transaction can be completed. Request a minimum loan term that will cover your project timescale with a margin for error added on
Option to extend the loan term – even if you obtain a bridge loan with a duration that should cover your needs, you want the option to extend without heavy fees attached. Stuff happens in business. Build in a safety clause that doesn’t leave you out of pocket.

How to decide if a commercial real estate bridge loan is right for my business?

Deciding if a commercial real estate bridge loan is right for your business is a balance between cost and opportunity. Because bridge loans are usually more expensive than other forms of business financing, you must compare the added cost to the potential reward you will gain from the opportunity if you use more costly financing. If the reward outweighs the added cost, a bridge loan may be suitable for your needs.

When would you choose a commercial bridge loan?

The potential reward outweighs the added costs
The opportunity you need to finance is too valuable to pass up
You do not have time to obtain other financing
You only need the loan temporarily

When would you not choose a commercial bridge loan?

The potential reward does not outweigh the added costs
You can wait for other opportunities when your financial situation has improved
You have time to find other forms of financing
You need a long-term loan
You do not want to provide collateral for the loan

What's the difference between a bridge loan and a traditional loan?

Unlike traditional business loans, commercial bridge loans almost always require real estate collateral to secure the financing. This is why bridge loans are most commonly used to fund real estate transactions.

Traditional business loans may be obtained using other forms of collateral – such as inventory or business machinery – or even without providing collateral at all. Additionally, traditional loans typically have lower interest rates than bridge loans and they can be very long-term – 25 years or more.

Bridge loan vs commercial equity line of credit (CELOC)

A commercial bridge loan provides short-term funding for immediate commercial real estate needs, such as acquisitions or renovations. In contrast, a CELOC (commercial equity line of credit) is a revolving line of credit secured by commercial property. It functions like a high-value credit card, enabling borrowers to access funds when they want as much as they want, up to the limit of the credit line.

Differences between a commercial bridge loan and a CELOC at a glance:

Commercial real estate bridge loan:

Short term loan (up to 3 years)
Uses real estate as collateral
High interest rates
Can fund quickly
65% to 80% LTV

Commercial equity line of credit:

Long term loan (up to 10 years)
Can use real estate as collateral
Standard interest rates
Can fund quickly
Up to 90% LTV

How Swoop can help

For a commercial real estate bridge loan or any type of business loan, working with business finance experts can make all the difference when applying for funding. Contact Swoop to discuss your borrowing needs, get help with your application and to compare high-quality commercial bridge loans and business loans from a choice of lenders. Don’t let a gap in funding derail your real estate project. Register with Swoop today.

Written by

Chris Godfrey

Chris is a freelance copywriter and content creator. He has been active in the marketing, advertising, and publishing industries for more than twenty-five years. Writing for Wells Fargo Bank, Visa, Experian, Ebay, Flywire, insurers and pension funds, his words have appeared online and in print to inform, entertain and explain the complex world of US consumer and business finance.

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