There is a time and a place for bridge loans, but it’s essential for borrowers to know these loans do come with a higher risk than other types of loans. To make sure you apply for the best possible loan solution for your situation, it’s important to learn as much as you can about the structure, terms, timing, benefits and risks associated with bridge loans. These types of loans are commonly used for business mergers because they are so quick and easy to obtain. Here’s why Florida entrepreneurs commonly use bridge loans for business, even though they come with higher fees and interest rates than most other loans.
Why Bridge Loans Appeal to Florida Entrepreneurs
Securing a bridge loan quickly may be the best way to avoid missing out on business opportunities. Since timing is everything when it comes to taking advantage of a good business merger opportunity, most borrowers won’t bother with traditional loans that can take weeks or potentially months for approval. Depending on how good the deal is, it may be unavailable by the time traditional loan approval is granted.
That’s where bridge loans come in. Though they are associated with complex loan terms, they do offer rapid funding. This rapid arrival of funds can help entrepreneurs avoid missing out on an acquisition opportunity that is likely to be snatched up quickly. Any wise bridge loan applicant should know, though, that the associated fees and interest rates can make the balance of the loan tricky to pay off. That’s why it’s extremely important to make sure the projected financial benefits of the acquisition are sufficient to pay off not only the original amount of the bridge loan, but all fees and interest associated with the loan.
How Bridge Loans Are Structured
A typical bridge loan is structured to provide very short-term financing (typically less than 12 months) with the primary role of filling a financial gap. Usually, this gap is filled once the borrower secures permanent financing or receives sufficient cash to pay off the loan through the sale of another owned property. The interest rates associated with bridge loans varies, but is primarily based on the credit profile of the borrower. The better the profile, the lower the interest rate, and vice versa.
However, no matter how pristine the credit profile of the borrower may be, the interest rate associated with a bridge loan will almost always be higher than the rates associated with long-term forms of financing. Additionally, such interest rates tend to trend upward over time, though they may be subject to a cap.
Bridge loans typically convert automatically into term loans or bonds if they are not paid off within their stated terms. Generally, these term loans or bonds have a maturity of anywhere between five and 10 years. they also have higher interest rates than other loans with comparable terms. When a bridge loan converts to a loan with a longer maturity, the borrower may be required to pay liquidated damages.
Other notable features of bridge loans include the following:
- Securities demand. This gives the lenders the right to require that the borrower refinance the bridge loan by using the capital markets to issue long-term debt securities. When the securities demand conditions are met, the control of the long-term financing market timing is given to the investment bank. Sales process requirements, timing, and number and size of the securities demands are all points of negotiation.
- Securities demand failure. If the securities demand fails to provide enough funds to fully repay the bridge loan, borrowers and lenders usually negotiate solutions. Generally, the lender will request the freedom to increase the interest rate on the bridge loan to the highest allowable rate or modify the terms of the loan to include defeasance. Other solutions may include defaulting under the loan or payment of a rollover/conversion fee.
Borrowers may also seek to limit the repercussions of a securities demand failure by requesting a provision that permits them to refuse a potentially adverse securities demand.
Bridge Loan Fee Structures
Borrowers who have never taken out bridge loans before are encouraged to learn as much as they can about the fee structures associated with such loans. Potential fees include the following:
- Funding fee. This is a fee that is payable on the closing date of the bridge loan. In the event that the bridge loan is refinanced before it matures, some lenders may partially refund this fee, depending on the time that lapses between funding and repayment.
- Commitment fee. This fee is typically payable whether not the bridge loan is funded or not.
- Duration fee. This periodic fee is added to the bridge loan’s outstanding balance. Sometimes, the duration fee increases over time.
- Bond underwriting fee. Underwriting a bond to take the place of the bridge loan typically comes with an associated bond underwriting fee.
- Conversion/rollover fee. This type of fee is typically applied if the bridge loan is not refinanced when it reaches the end of its initial term and goes through the long-term financing conversion process. Usually, the conversion or rollover fee is equal to an underwriting fee which would have been applied to the loan if it were replaced in a bond offering. It is possible that the funding fee could be eligible for a refund based on when the bridge loan is repaid once the initial term ends.
- Deal-away fee. This fee applies to the lenders on the loan closing date if any other financing source is used. It’s designed to help compensate lenders for fees they would have received if a bridge loan was used.
- Refinancing fee. If the loan is refinanced before its initial term is over, a refinancing fee may be applied. This fee is usually equal to the conversion or rollover fee.
- Administrative agent’s fee. If the loan is syndicated, the lender usually receives an administrative agent’s fee once the loan is funded. This fee may be applied annually for the life of the loan.
Some of these fees could overlap others (such as the bond underwriting fee if the same investment bank that issues the loan places the bond offering). To avoid unexpected fees, it’s very important for borrowers to carefully review and analyze the terms of a bridge loan before closing. It is also important for borrowers to make sure a bridge loan and its associated fees are outweighed by the benefits associated with acquiring the money quickly to engage in business mergers or for other professional deals or goals. Though they are associated with higher costs and fees than some other types of loans, bridge loans are still ideal for certain situations that require financing to be obtained very quickly. Without this option, many entrepreneurs would likely find themselves unable to act quickly enough on business deals to obtain their goals.
Flex Provisions
Market flex provisions in fee letters may be a viable option for sponsors who know how to fully negotiate underwritten commitment letters that have multiple arrangers and lead lenders. These flex provisions can apply to bridge loan commitments and allow for broad discretion in regard to varying the terms of financing. Capital market conditions, leverage, sponsor relationship and other factors can determine the scope of flex rights. However, in applicable situations, loan terms such as maturities, price, financial covenant calculations and structure may be subject to flex.
Determining if Bridge Loans Are Right for You
Astute borrowers should understand that bridge loans aren’t the best solution for every situation. However, when time is of the essence and a deal needs to be made quickly, short-term loans like these come in handy. It’s important to try to seek the best terms when it comes to bridge loan financing to ensure the benefits of this type of loan outweigh the increased initial costs. With negotiation and knowledge, borrowers may be able to limit their risks. Here at HML Solutions, we always give high priority to the needs of our borrowers. As with all our other loan products, we structure our bridge loans to be as generous as possible.
Our primary goal is to help our borrowers secure financing that is the right fit for their current needs. We’ll sit down with you to make sure a bridge loan is truly the best option for your current situation. If we don’t think it is, we’ll recommend one of our other leading loan types. You’ll find that we are very easy to work with and have some of the best rates and terms in the industry. You’ll also find that working with a private lender is often more rewarding and enjoyable than working with a big bank.
Contact Us
If you need financing to help you merge with another business or meet your pressing entrepreneurial goals, we can help. Whether you apply for one of our bridge loans or select another financial product from our impressive portfolio, we’ll be happy to walk you through the application process. We’ll answer any questions you have about our various loan products and explain their benefits and terms to you in detail. To get started, contact us today during regular business hours or reach out to us through our online form at your convenience. We look forward to meeting your financing needs!