Deciding whether to choose a conventional loan or a bridge loan is a completely scenario based decision. What is it that you, as a business, are trying to achieve? Before you think you know all the considerations, the three points below will help clarify which direction you should go.
Loan Type Term Length Comparisons
Conventional loans are traditionally longer-term loans, usually ten to twenty plus years in length as either variable or fixed rates. Bridge loans are gap loans. They tend to be three years or less and focus on bridging the liquidity gap in a project. These are paid back relatively quickly. Both loan types do not normally have early pay penalties.
Loan Type Rate Comparisons
Bridge loans typically offer higher rates than conventional loans. The reason for this is due to the shorter-term nature of bridge loans. The shorter the term, the less money a lender will make on the loan. While a business owner might not care about how much the lender makes, you need to consider that if the lender does not make much money on the loan, then why would he loan the money at all? It is a ‘what’s in it for me?’ scenario.
Since conventional loans have longer terms, the lenders do not have to shove their margin into a compressed time-frame and can make it up over the longer term. Typically, you will not see prepayment penalties so a business owner could prevent the lender from making the maximum profit on a deal but it does not happen often so this does not concern lenders.
Alternative Lenders are Strong on Bridge Loans
While FDIC insured banks can offer bridge loans as many do, it is not as common a practice as most people would think. Realistically, it is easier to get a bridge loan with flexible options from alternative or hard money lenders. Certain alternative lenders specialize in niche industries, such as hospitality, and offer the best programs for a borrower. Often collateral or reserves will be necessary to secure the financing.
Bridge loans have the risk of misjudged timing. Sometimes borrowers misjudge how long they will need to carry the loan, and it can become a financial burden for the business owner and defaults for the lender. Bridge loans are great, and good lenders will have the experience to guess the true timeline for certain projects.
Conventional loans and bridge loans each have their place depending on what the business owner wants to do. Knowing the details of each type of loan helps the business owner approach the right lender without wasting much time. Magilla Loans is a fantastic place to start because based on a simple questionnaire, a borrower can be matched with experienced lenders who focus on their particular project’s needs. All for free. Whether you need a bridge loan or a conventional loan, finding the right lenders to finance the loan is the hardest part.