A bridge loan is a short-term financing solution for people or companies in transitional states. Bridge loans allow for quick access to cash flow so financial obligations can still be met before long-term financing is available. In many cases, a bridge loan requires collateral, typically in the form of company or property equity.
How Does a Bridge Loan Work?
The name “bridge loan” comes from the idea that this type of financing provides a bridge during gaps of income stream. A common example of a bridge loan for an individual stems from the period after the purchase of a new home but before the selling of their current or previous home. As the individual may lack the funds for a down payment without the proceeds from their sale, a bridge loan can help cover the gaps until their current home is sold.
Besides the need for collateral, a bridge loan typically come with higher interest rates than other financial instruments. The higher interest rates are due to the are short-term nature of these types of loans. To put this into perspective, a bridge loan typically has a term of no longer than a year. Home equity lines of credit, a similar form of financing that grants the financial institution equity in your home, often provided access to revolving lines of funds for around 10 years.
What Are the Current Opportunities for Bridge Loan Financing?
Two unique opportunities arose for bridge loan-style financing during the late 2010s: multifamily residences and medical offices. Both represent spaces in real estate that are capital-intensive due to their evolving worlds.
As homeownership percentages decline, especially with regard to millennials, the demand for multifamily residences has grown. To meet the needs of this increase in demand, property owners are investing more and more money into updating their residences. This allows for improved revenue streams not just from demand but from the inclusion of expected amenities, too. However, property owners need to pay for these improvements upfront before their investments pay off. This provides an opportunity to provide bridge loan financing.
Another area of growth for bridge loans is in the medical space. As technology improves, once-exclusive procedures become commonplace. This means medical groups have to invest in space and technological improvements to have the furthest reach. It also allows them to push their procedures and therapies out of traditional hospital settings and into offices and other locations. Again, this requires an upfront investment that can be made easier through bridge loan financing.
As lenders, there are clear opportunities to provide bridge loans to both individuals and companies. Finding the right opportunity is about knowing when upfront investments may be cost-prohibitive in the short-term.