There are several situations in which a bridge loan is a suitable fit to fill the gaps in your financial plans. Whether you’re looking for access to capital for a new project, to fill out lost tenancy opportunities, or to hold you over until a long-term loan becomes a viable option, there are situations when bridge loans make perfect sense. Yet, as useful and sometimes necessary as bridge loans can be, there are wrong times to consider them as a viable option. Before you move forward with your next commercial bridge loan, consider these instances where a bridge loan is not the best fit for you. If you have determined that a bridge loan is not a suitable fit, consider speaking with a loan expert to determine which loan will best fit your needs.
When You’re Dealing with a High Risk Prospective Project
Despite the fact that bridge loans often have an incredibly fast turnaround time, they also feature high interest rates and terms that are shorter than other traditional loan options. Considering this, if your project is not likely to receive long-term financing due to a high risk of failure of profit shortcomings, a bridge loan is likely to end up costing you more than it aids you.
When You’re Working With an Unscrupulous Lender
Admittedly, there are sometimes factors beyond your control that determine whether a loan option is a good fit for your current situation. Experienced real estate investors may be wary of their relationships with lenders, but those newer to the market may not be as aware. Be sure to always ask about the fees and potential penalties associated with a loan package. While this tip is not exclusive to the nature of bridge loans, given the potentially volatile nature of the bridge loan’s interest, it’s important for you to know exactly what the terms of the agreement are before you commit to the loan. If you sense that your lender is not being transparent about those fees and potential penalties, consider taking your business elsewhere or use a lower-risk loan.
When You’re Already in Debt
As you know, loans are common financing options to help with real estate projects, meaning that they can pile up if they aren’t managed properly. Of course, bridge loans can be used to pay off existing long-term loans from previous projects you have managed; but they’re not a smart option if you’re already facing extensive debts without a solid possibility of income in the near future. Since bridge loans typically have high interest rates and require physical collateral, relying on them to whittle down debt is likely to work against you.
When Your Credit Score Has Dropped Significantly
Similar to many other loan types, bridge loan lenders will not issue a loan if your credit score is far below a certain threshold. In some situations, a lender will allow you a co-signer or a guarantor. However, if you’re not working with a partner that has a better credit score, you could be out of luck. That being said, always feel free to be open with your lenders and work toward developing a strong relationship.
Bridge loans are an essential aspect of the real estate industry, from fix and flips to new construction projects and everything in between. Regardless of their prominence, it’s crucial that you know if and when a bridge loan is the best financing option for your situation. If you’re interested in learning more about a bridge loan, but you’re unsure whether or not it would be the right fit for you and your project, talk to the experts. The team here at RCN capital will be glad to help you find the best option for your project goals. Please contact us today for more information.