commercial bridge loan

Commercial Bridge Loan: Your Informative Guide for 2022

It’s easy to think that a bridging loan is similar to your typical business loan. They’re both loans anyway, right? But knowing the purpose of each loan will help you choose the most suitable option for a specific need.

For starters, most bridging loans are short-term loan options. On the other hand, business loans are long-term alternatives. Also, you wait for a shorter time with bridging loans. Meanwhile, business loans have a longer waiting time. This is because the lender checks your credit history and background.

When a business wants to secure commercial real estate and to have some additional funds for the rehabilitation of the property, a commercial bridge loan might help fill the gap. 

What is Commercial Bridge Loan?

Also referred to as ‘gap financing,’ interim financing, bridge financing, or swing financing, a commercial bridge loan is a short-term financing loan option. Most business owners use them to secure the commercial property quickly. They ‘bridge the gap’ between an establishment’s current need for financing and long-term financing.

Features

A commercial bridge loan has several unique features:

  • It’s normally secured by collateral, which can be real estate or inventory in the case of organizations and property in the case of people.
  • It lasts for a short duration, usually 3 months to a year.
  • Its interest rates are much higher (5-6% depending on the bank and 1-4% depending on the moneylender) than typical loans. This is because of its short nature and risk.
  • It aims to provide immediate cash flow until the borrower finds a long-term option.
  • It has a lesser LTV (Loan-To-Value) ratio compared to other loans. A residential property’s ratio may reach 80%, while a commercial property may go up to 65%. The LTV is a digit lenders use to determine how much risk they’re taking with a secured loan. It measures the relationship between the credit amount and the market value of the asset securing the credit.

Benefits

A commercial bridge loan has several other uses, as well as limitations:

  • Funding renovation costs, either for commercial properties or your commercial real estate.
  • Buying other businesses.
  • Purchasing large requirements, like equipment
  • Boosting money flow for payroll
  • Paying a commercial property’s rent
  • Purchasing commercial property for business growth

Risks

  • It’s risky- banks use your property as collateral should you default to pay your loan before or on the agreed time. However, moneylenders provide unsecured bridging loans.
  • It might have high closing fees.
  • It has higher interest rates.
  • The interest rates might be higher with time.

 

Two Types of Government Commercial Bridge Loans

Before you decide to apply for a commercial bridge loan, get to know the types of loans you can get and what suits your business situation. 

1. SME Working Capital Loan

Borrowers take a working capital loan to cover a business’ extra capital. A company uses such a loan to pay for its daily operating costs. The Singapore Government has partnered with banks to offer SME working capital loans under the Enterprise Finance Scheme (EFS). Each borrower is entitled to a maximum amount of S$300,000 with a maximum repayment duration of 5 years.

2. Temporary Bridging Loan Programme (TBLP)

A scheme established in March 2020 by the Singapore government, it was meant to help Singapore businesses financially as they dealt with the effects of COVID-19. It was in place from 1st April to 30th September 2022. Qualified companies can borrow up to S$1,000,000 with a payment period of 5 years. It has a capped interest rate of 5.5%.

How do Commercial Bridge Loans work?

Now that you already know the nature of a Commercial Bridge Loan, here’s a breakdown of the process to have a better understanding of how this loan works:

  • A developer or investor finds a promising venture and applies for a commercial bridge loan with a lender. They provide the necessary documents and details and receive the loan within at least 48 hours.
  • The commercial bridge loan lenders consider several factors before giving the loan. The main one is the loan-to-cost (LTC). This is the maximum percentage of the combined price the lender provides the borrower with. The LTC is 70-80% for most lenders.

Here’s an illustration to explain the concept further:

Assuming you’re buying property worth S$100,000. And the lender offers a commercial bridge loan worth 80% LTC. You’ll get S$80,000 from them and seek the remaining S$20,000.

The lender establishes the rates and terms of the loan. You receive the loan once the loan is approved.

NB: The property you buy with the loan funds is usually the collateral that secures the credit. That means the lender can seize and sell the property if you default on payment so that they can recover the losses.

guy with briefcase walking through cash

Things to Look Out For When Getting a Commercial Bridge Loan

Receiving a commercial bridging loan may be simple, but paying for it may not be as smooth. That’s why you should put several factors into consideration before applying for it:

  • The amount you can afford: Please ensure you can comfortably afford the monthly loan repayments. You can compare offers from various sources before making a financial decision.
  • How badly you want the funding: Ensure you’ll receive the money on time if you need it for an urgent business opportunity. It may be wise to avoid loans from traditional lenders like banks. With them, your bridge loan application may take at least two weeks. On the other hand, licensed moneylenders can sometimes fund your application in a day or less.
  • Early repayment incentives: Some lenders provide early repayment incentives like discounts. After all, the credit is temporary and requires that you clear it early. However, please note that some financial institutions charge fees if you pay in advance. That’s why you’re safer inquiring about the charges and expenses involved in taking a swing loan.
  • Collateral: Your collateral’s worth often determines how much cash you can borrow.
  • Interest rate: Its rate is higher, considering it’s a short-term loan. You can either have your loan amortised, where you offer a staggered payment of a fixed amount monthly. You can also opt for amortised payment, where you pay a chunk of the interest rate at the end of your loan’s term.

Commercial Bridge Loan vs Traditional Bank Loans

Here’s a table explaining the major differences between each loan:

SME Working Capital Loan Business Term Loan Personal Loan
Purpose of the Loan Provides access to working capital for business requirements Used for working capital, equipment, or real estate Depends on what the borrower requires
Maximum Loan Amount Up to S$300,000 Up to S$500,000 Up to 10x times your monthly income
Loan Tenure Up to 5 years 1-5 years 1-7 years
Interest Rate Depending on Participating Financial Institution’s evaluation 7-12% p.a. At least 5-6% p.a.

 

Alternative to a Commercial Bridge Loan: Licensed Moneylenders

Failed to qualify for an SME Working Loan or bank loans? Not all hope is lost, as there are other financing options to choose from. For instance, you can still get a business loan from a licensed moneylender in Singapore

Key Features

Minimum Income Loan Amount Interest Rate Loan Tenure
Singaporean or Permanent Resident: S$1,500, Up to $200,000 5-15% Repayment terms up to 24 months

 

Advantages of Getting Your Business Loan from a Licensed Moneylender

There are tons of other reasons to give them a chance. Here are some of the main ones:

1 .The Ministry of Law Regulates Them

The Ministry of Law in Singapore (MinLaw) ensures Singapore borrowers are protected from financial exploitation. The ministry set an interest cap of 4% per month on licensed moneylender loans. That’s the maximum they can charge you despite your income and loan amount.

2. Your Credit Score Won’t Matter

It’s not a secret that banks look at your credit score, and having a good credit history is among their top requirements in granting a loan. It’s great to have a good credit score, but what if that’s not the case? Licensed Moneylenders allow you to apply for a loan regardless of your low credit score. 

3. The Application Process is Straightforward

You can apply for commercial bridge loans from a licensed moneylender online. Here’s a step-by-step guide of the procedure if you do it online:

  1. Visit your preferred moneylender’s website and fill in the required details
  2. Wait for the loan officer to call you if you’re eligible
  3. Prepare the necessary papers and present your documents to the lender’s office
  4. The officer should explain the terms and conditions of the loan contract
  5. Sign the contract and get your cash on the same day!

Final Word

A commercial bridge loan is a reliable short-term finance option for businesses to have immediate funding. However, just like any other loan, it has its risks.

Key Takeaways

  • Commercial bridge loans ‘bridge the gap’ between a business’ current need to purchase commercial real estate when it can no longer wait for permanent financing, or you’re waiting to refinance an existing business loan.
  • Commercial bridge loans are beneficial since they save from cash crunches but are equally risky.
  • If you’re looking for other ways to borrow cash for your SME, business loans and personal loans are your next best options. 

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