Suffering from debt? It could be from college fees, bankruptcy, or lack of financial management. Take comfort in the fact you’re not alone.

In fact, the average debt of an American household is at $137,000. This is something alarming, as the average income of a household is $59,000.

There are a lot of ways to earn passive income. But if you’re in a bind, commercial bridge loans might be the best for you. Read on if you want to know more about how bridge loans work.

What is a Bridge Loan?

Also known as bridge financing, this type of loan is short-term. It’s designed to help bridge the financial gap between your current and future situations. It’s most common in commercial real estate before people can settle for permanent financing such as mortgages.

Most people that use this type of loan is rehabbers. These people will buy, fix, and sell properties. View here if you want to learn more about other commercial loans.

How Do Bridge Loans Work?

The best way this loan function is to bridge the financial gap between buying a property and getting its future financing. Most of these loans can have terms that range from a few months to a year. On rare occasion, some terms can go beyond a year.

A bridge loan needs collaterals, which means you put up a property you have ownership with. Alternatively, you can put up a property you will soon purchase. Often, your loan gets approved based on the collateral value rather than your credit score.

This way, you can get a commercial bridge loan easier compared to standard mortgages. The funds you get from this loan are great for the property you own or a property you want to get. In some cases, you can apply it to both.

When is a Bridge Loan Most Effective?

Here are some situations where you can lean on bridge loans to get financial support:

1. Moving a Business

You might need to get a bridge loan if your business moves its location to another place. If you get a bridge loan, you can use it as a down payment for your new property location. In some cases, you might find a use for it as payment for the remaining mortgage on your old location.

2. Buying Opportunity

There might be some new properties you need to snag before your competitors get to it first. With bridge loans, you can have the down payment you need as well as installments on the new property. It should last you until you have the capability to have long-term financing.

3. Rehabilitation

If you own a property that doesn’t perform up to the current standard, you can use bridge loans to rehabilitate it. You can use the money to maximize its potential for profit. You can use the money to do renovations or increase its occupancy rate.

The funds you gain from this loan can help with the remedial job. Once the property performs to its fullest, you can use your long-term financing means to improve it further.

4. Credit Score

If you have an undesirable credit score, you might not have the means of getting money from traditional loans. It’s especially the case when you’re trying to opt for commercial real estate financing. Bridge loans are short-term so it’s available for you no matter how bad your credit score is.

Opt for bridge loans and do your best to pay it on time. It gives you a great opportunity to get a credit score boost. In some cases, it improves enough to become eligible for long-term financing.

How Do You Qualify for a Bridge Loan?

As a general rule, you can get a bridge loan due to the value of the property you put as collateral. To get a limit on the lenders’ financial exposure, these loans have a cap of 70-80% based on your property’s value. It’s expected for you to give the remainder as a part of your own equity.

Some lenders might have specific requirements when it comes to the collateral property. They might look at its locality and its current state. There are lenders that might check on any major detrimental events you might have.

It’s the best if you don’t have past bankruptcies, lawsuits, felonies, and others.

Where Do You Get a Bridge Loan?

There are a lot of sources for you to get a bridge loan. Some of these include banks, credit unions, and other private financing companies. If you want to get permanent financing sometime in the future, it’s better to get it from the same source as your bridge loan.

The likelihood of you getting a better deal increases if you do this.

Rehabbers have more options since there are a lot of hard money lenders online. They often specialize in bridge loans to people who like buying and selling commercial properties.

When selecting your provider, ensure that you pay attention to prepayment penalties.

It’s better that you opt for lenders that don’t offer these. It can get expensive since it’s possible to get a penalty of up to nine months’ worth of interest if you prepay a year’s worth of loan.

It becomes difficult since you might get the funds to pay off your debt before the term completes. If you want more flexibility in your payment terms, avoid prepayment penalties.

Learn About Commercial Bridge Loans Today!

If you can sell your property before getting a new one, you should do it.

Otherwise, it’s best if you use commercial bridge loans to either help with renovations or give the capital to both buying and improving a property. It works for a lot of property types like retail, office, and industrial locations.

Another use you can get from bridge loans is to get a more permanent financing option.

The property gets greater equity, meaning you can get lower rates and longer terms of repayments. It’s perfect as a means of jumpstarting a commercial property to its fullest potential.

Do you need more information before getting a credit card? Read our guide to get the most out of it.