Bridge Construction Loans

A bridge construction loan is a short-term financing option designed to bridge the gap between the commencement of a construction project and the acquisition of long-term funding. This loan can provide critical cash flow during the initial phases of construction.

A bridge loan for new construction provides businesses and small business owners with the necessary capital to kickstart their construction projects while they secure long-term funding or sell another property. As a form of interim financing, bridge construction loans have shorter terms than traditional loans, typically ranging from 6 months to 3 years.

Construction bridge lenders offer these loans with the understanding that the borrower will either sell the property or refinance it into a longer-term loan once construction is completed. This makes bridge construction loans particularly beneficial for business owners who need immediate funds to begin a construction project but have their capital tied up elsewhere.

What Is a Bridge Construction Loan, and How Does It Work?

A bridge construction loan is a temporary loan designed to finance the initial stages of a construction project. It ‘bridges’ the gap between starting construction and securing long-term funding, ensuring a project can proceed without delay.

A bridge construction loan is essentially an interim financing option for businesses, small business owners, or real estate developers who are starting a construction project. These loans are short-term, usually lasting between 6 to 18 months, and they help finance the initial stages of a construction project until long-term financing can be obtained, such as a mortgage or a larger construction loan.

Bridge construction loans are especially beneficial when a project needs to get started before a previous property has sold or before long-term financing is in place. This is often the case when a business is expanding, a real estate developer is starting a new project, or a small business owner is building a new location.

Bridge Construction Loan: Learn Loan Amount and Rates

Rates and funding amounts will vary from case to case, but it helps to understand them before applying.

Bridge Construction Loan Amounts

Bridge construction loans, much like other types of construction loans, have a loan amount that largely depends on the scope and cost of the construction project. Lenders typically provide a percentage of the total project cost, often in the range of 60% to 80%, though this may vary based on the lender’s policies and the specifics of the project. It’s also worth noting that the loan amount may be influenced by the borrower’s creditworthiness and financial stability.

Interest Rates for Bridge Construction Loans

Bridge construction loans typically come with higher interest rates compared to long-term financing options due to the short-term nature and inherent risk of these loans. Interest rates on bridge construction loans typically range from 6% to 15%, depending on the lender, the specifics of the project, and the borrower’s credit profile.

Fees Associated with Bridge Construction Loans

There are also a variety of fees that borrowers should be aware of when considering a bridge construction loan:

• Origination Fee: This is a fee charged by the lender for processing a new loan application. It’s usually expressed as a percentage of the total loan amount and generally ranges from 1% to 3%.
• Prepayment Penalty: Some lenders may charge a fee if the loan is paid off before the end of the term. This is not universal, however, and varies from lender to lender.
• Exit Fee: An exit fee is charged by some lenders when the loan is repaid. This fee may be a flat rate or a percentage of the original loan amount or the remaining balance.
• Extension Fee: If the loan term needs to be extended, some lenders may charge an extension fee.

What Are the Types of Bridge Construction Loans?

Who Is Eligible for a Bridge Construction Loan?

Here’s who can qualify for a bridge construction loan:

• Property Developers: Those in the business of buying, building, and selling properties. They often use bridge construction loans to finance projects before securing long-term financing or selling the property.
• Homeowners: If an individual is looking to buy a new house before selling their existing one, a bridge construction loan can provide the necessary funds for the transition.
• Real Estate Investors: Individuals or businesses investing in commercial or residential real estate might find bridge construction loans useful, especially when needing to act quickly on a new investment opportunity.
• Business Owners: For businesses looking to expand or move into a new space, a bridge construction loan can provide short-term financing for construction or renovation work while waiting for a longer-term loan or other funding to come through.
• Individuals with Strong Credit: Like other types of loans, those with a high credit score are more likely to qualify for a bridge construction loan. Lenders often look for a strong credit history as an indicator that the borrower can repay the loan.

Risks and Considerations Associated with Bridge Construction Loans?

Bridge construction loan risks include:

• Interest Rate Fluctuations: Bridge loans often come with variable interest rates, meaning the rate is tied to a benchmark and fluctuates with market conditions. If interest rates increase, your interest costs rise correspondingly. This could affect your budget and the feasibility of your project, especially if rates rise significantly. To mitigate this risk, it’s crucial to have a contingency plan for possible rate increases.
• Market Volatility: Real estate markets can be unpredictable, and any downturn can impact the feasibility of your exit strategy, whether it’s selling a property or securing long-term financing. If property values drop, it may become challenging to sell a property at the expected price or even secure a mortgage. This could leave you struggling to pay off the bridge loan, which has a shorter repayment term.
• Construction Delays: Construction projects are often subject to unexpected delays, from permit issues to supply chain disruptions. If your project is delayed and extends beyond the term of your bridge loan, you could be left scrambling to find additional funding or face difficulties repaying the loan.
• High Costs: Bridge loans typically have higher interest rates and origination fees compared to other financing options. This reflects the increased risk lenders face given the short-term nature and typical lack of a straightforward repayment source (as opposed to a mortgage, for instance).
• Repayment Pressure: Given the short-term nature of bridge loans, borrowers face the pressure of securing long-term financing or selling a property quickly to repay the loan. This can be particularly challenging in a volatile market or if a project encounters unforeseen issues or delays.

Bridge Construction Loans: Qualification Requirements

Securing a bridge construction loan can be a significant step in your construction project, but it’s important to note that lenders have certain requirements in place to minimize associated risks.

Qualification criteria for bridge construction loans include:

• Credit Score: Credit scores are a vital metric used by lenders to assess a borrower’s creditworthiness. Typically, a high credit score (680 or above) can increase your chances of qualifying for a bridge construction loan. It also helps to secure favorable terms.
• Financial Statements: Lenders will want to see detailed financial statements, including profit & loss statements, balance sheets, and cash flow statements, to assess the financial health of your business. The stronger the financial condition, the higher the chances of qualifying for a loan.
• Project Feasibility: The feasibility of the project you plan to undertake with the loan proceeds plays a crucial role in the approval process. Lenders will consider the proposed project’s viability, expected returns, and potential risks before approving a loan. A well-prepared and detailed project plan can increase your chances of securing the loan.
• Experience in Construction: Lenders may also assess your or your team’s experience in managing and completing similar construction projects. A strong track record in handling construction projects can positively influence the approval process.
• Collateral: Bridge construction loans are typically secured, meaning you’ll need to provide collateral. This could be the property being constructed or other assets. The value and liquidity of the collateral can significantly impact your eligibility for the loan.
• Debt Service Coverage Ratio (DSCR): Lenders will also look at your DSCR, a measurement of cash flow available to pay current debt obligations. A higher DSCR indicates that a borrower has sufficient income to cover existing debts, which reassures lenders.

It’s crucial to thoroughly understand these qualification requirements when considering a bridge construction loan. Be prepared to present strong evidence and documentation in these areas when approaching bridge construction lenders.

How to Apply for Bridge Construction Loan: Step-by-Step Guide

Applying for a bridge construction loan doesn’t have to be overwhelming or complex. With proper preparation and guidance, you can efficiently navigate the process.

Here’s a step-by-step guide to applying for a bridge construction loan:

• Submit Online Application: Start the application process with National Business Capital (NBC). It’s designed to be straightforward and efficient. Fill out their online loan application, which should only take a few minutes. Be sure to include all the relevant information to avoid any potential delays.
• Initial Consultation: After submitting your online application, you’ll speak with an NBC loan specialist. They’ll guide you through the loan process, helping you understand your options and tailoring the best solutions for your needs.
• Preparation: Gather all necessary documents, including financial statements, credit history, detailed project plans, and information about the collateral you plan to offer.
• Application Review: Your application and submitted documentation will undergo review. This evaluation will consider your credit score, financial stability, and the feasibility of your proposed construction project.
• Getting Competitive Offers: Unlike traditional loan applications where you’d apply to individual lenders, NBC does the legwork for you. They present your application to over 75+ lenders within their marketplace, ensuring you receive the most competitive offers you qualify for.
• Loan Approval: After comparing offers, NBC will guide you to the one that suits your needs best. With their assistance, you’ll likely secure favorable rates and higher chances of approval.
• Sign Agreement: Once you’re satisfied with the terms and conditions, sign the loan agreement to move forward with the loan process.
• Receive Your Funds: The approved loan amount will be disbursed according to the agreed-upon terms, allowing you to kick start or progress with your construction project.
• Loan Repayment: Ensure you adhere to the repayment schedule outlined in your loan agreement. Timely repayments can not only enhance your credit history but also pave the way for future financing opportunities.

Alternative Loan Options to Bridge Construction Loans

Alternative options to bridge construction loans include: