Many investors may not have heard about bridge financing. Most people are familiar with mortgages, credit cards, bank loans, or even corporate bonds as vehicles for debt financing. Think of bridge financing as another tool you can use to finance a project.

Bridge financing or hard money lending is an alternative form of financing to commercial loans or mortgages. Whereas bank financing can impose strict (often inflexible) underwriting requirements that take a long time to process, bridge lenders can make funding decisions much more quickly than conventional banks. When presented with an investment opportunity, borrowers can take advantage of this speed to reduce the risk that they will not be able to raise funds in a timely manner.

Bridge financing is sometimes referred to as “hard money lending” as one of its defining characteristics is that it is secured by a real asset such as property. Rather than follow a predetermined set of criteria, hard money lenders consider the viability of the project, the borrower’s previous history, and the value of the collateral to make a funding decision. For this reason, borrowers often seek out hard money loans when they are unable to secure financing from a commercial bank.

Features of hard money lending

• Short term with loan maturity less than two years
• Quick underwriting and funding decisions
• Secured by collateral, typically property
• Loan to value is typically 30% to 70%

Use cases

• Renovate and flip. Finance the purchase and renovation of a home. The bridge loan is repaid when the borrower sells the refurbished property for a profit.
• Cash out refinancing. Borrow against the equity in one property to purchase and/or refurbish a second property. The bridge loan is repaid when the borrower sells the second property or obtains a conventional loan based on its increased value
• Cash purchase. Borrow money to make an all-cash purchase for a property – cash offers are often more attractive to sellers. The bridge loan is repaid when the borrower refinances the property with a conventional loan.
• Bridge to long term financing. Bootstrap a project with funding from a bridge loan while the investor is in the process of raising long term financing. The short term bridge loan is repaid when the borrower receives funds from long term financing.
• Facilitate exchanges. In situations where the timing of a real estate transaction matters – for example in a 1031 exchange – borrowers might prefer to raise money quickly with a bridge loan in order to ensure the transaction completes within the required time frame.

Hopefully, this provides some idea of bridge financing. They key to any successful project is understanding and using the right tools. Bridge financing is another tool that you can use to enable a successful project.