How Bridge Financing Helps Small Businesses in West Florida

How Bridge Financing Helps Small Businesses in West Florida

What is the best type of financing for your business? Many small business owners would be tempted to respond, “The one that has the lowest interest rates,” but that’s not always the right answer. In reality, the best financing is the one that meets your company’s needs at the time. In many common situations that small businesses face, the solution is bridge financing.

What are bridge loans? They’re a type of short-term financing based on business assets. You receive funding based on the value of collateral such as inventory, equipment or real estate.

Traditional Funding Can Take a Lot of Time

One of the problems with conventional business loans is that the approval process can take significant time. We’re not talking about a few days or a week: Traditional loans can require several months before your company finally gets the green light.

Why is the approval process with economic development loans so excruciatingly slow? There are several steps that lenders need to follow. In the case of loans backed by the Small Business Administration, for example, it’s necessary for banks to check the applicant’s qualifications against SBA requirements.

During the application process, lenders have to check the application, look at your financial records, perform a credit check and meet to discuss underwriting questions. It also takes time to perform legal steps needed for the loan agreement, closing and other needs.

The Purpose of Bridge Financing

Fortunately, small business owners have several funding options available to help out in the meantime. That’s what bridge funding is all about. The purpose of a bridge loan (also called gap lending) is to “bridge the gap” with capital while you’re waiting for other sources of revenue or financing.

Ways Bridge Financing Helps Small Business Owners

Bridge loans may not have the same interest rates as long-term loans, but when it comes to flexible, short-term funding, nothing is better. There are many ways you can use this type of loan for your business:

  • Real estate projects: A common way to use a bridge loan is to close on a residential or commercial property while waiting for long-term, low-interest financing to get approved. That way, you don’t miss out on the property of your dreams.
  • Cash flow problems: Sometimes, businesses run into problems paying bills because clients haven’t paid their invoices yet. You can avoid credit problems by taking out a bridge loan in the meantime, then paying it off as soon as your customers pay you.
  • Business opportunities: Use bridge loans to take advantage of volume-based inventory purchases, special discounts on equipment or other opportunities.

The Advantages of Bridge Financing in West Florida

Bridge loans offer incredible flexibility. You can get approved and receive funds in about a week. This type of financing can cover 100% of the cost of equipment, inventory purchases, real estate, emergency needs and other business essentials. At HML Solutions, we’ve been providing this funding option for West Florida businesses for a long time. Contact us to see the benefits for yourself.

Their Utility and Difference form Traditional Loans

Their Utility and Difference form Traditional Loans

Here at HML Solutions, we offer hard money loans for a variety of purposes. Hard money loans are those loans that are usually secured by some form of real estate, which is then used as collateral against the money being lent.

Our hard money loans are typically used for the financing of real estate transactions. In addition to being collateralized by real estate, hard money loans differ from traditional loans in that they are generally paid off quickly, within a few years or less, and they can be obtained even if the applicant does not have stellar credit because the funding is indeed secured by real property.

Varieties of Hard Money Loans

We at HML Solutions are in the business of providing the three major types of hard money loans: Bridge loans, Transactional loans, and Rental loans.

Bridge Loans

We offer Bridge loans for people in the transition period between two major transactions. This type of loan is intended to “bridge” the financing gap that often arises when one property is bought before an already-owned one is sold. They tend to be popular because they often come with quick approval. Advantages of obtaining a bridge loan include easy qualification as well as quick and easy repayment provisions.

We are particularly interested in offering these loans to those in the fix-and-flip business.  Property flipping is a big business in many parts of the country now, and our bridge loans can help ensure the smooth transition from one project to the next so that our customer’s business stays on track.

Transactional Loans

We can provide transactional loans to qualified individuals. These are designed to offer short-term infusions of capital to real estate investors. They are generally obtained much more quickly than traditional loans, which often involve a long and drawn-out process.

They are most advantageous for investors who have found buyers who are willing to pay a lot higher for a property than its real value. Here is a typical transaction: An investor purchases a property using a transactional loan then sells the real estate to the buyer. Immediately thereafter, the investor would then pay the loan off using the proceeds from the sale and profit the difference.

A key advantage of transactional loans is that the loan is made based on the value of the property in the potential deal. Additionally, the investor does not have to come up with the cost of purchase from his or her own funds.

Rental Loans

At HML Solutions, we also offer rental loans intended for people who are looking to purchase rental properties. Owning rental property can be quite lucrative, although many investors need an up-front infusion of capital to get their first property or two.  In general, these are highly versatile loans tailored to the specific situation of each person.

There are a number of benefits in obtaining a rental loan, including quick approval, high flexibility, and the ability to earn rental profits in short order. Obtaining a rental loan can be an important step to realizing long-term rental income.

8 Ways To Use Hard Money Financing

If you haven’t used hard money financing before, it’s natural to have some questions. Many companies are turning to this flexible, fast and simple loan option. At HML Solutions, we’ve helped countless businesses in Florida, from construction businesses to real estate developers. How can you use a hard money loan to benefit your business?

Real Estate Purchases

In Florida’s high-speed housing market, you need capital if you want to snag the best deals on real estate. Hard money loans are fast, often providing financing in as little as a week. That way, you can close on hot properties before other buyers get a chance to start a bidding war.

Fix-and-Flip Projects

Whether you have your eyes on a bank foreclosure property or a house with a heart of gold that needs a lot of work, hard money financing can help. You can use this type of loan to purchase property, cover the cost of renovations, hire contractors and buy materials.

Asset Liquidations

Sometimes, it can take a while to sell a property you’ve inherited. The same thing goes when businesses want to sell heavy machinery or another type of equipment. If your company needs funds in the interim, hard money loans can cover your operations until the asset sells.

Business Acquisitions and Buyouts

Acquiring a business or buying out a business partner generally requires obtaining a large amount of capital in a short period. You don’t have months to wait for a long-term loan, and you can’t count on revenue until you complete the negotiations. That’s where short-term financing is a huge help.

Investment Property Improvements and Repairs

Property managers typically have a hard getting approved for traditional financing for property improvements. Lenders don’t see the value. Hard money loans are much more flexible. With high-value improvements, you can increase your profits every month from your commercial and residential rental properties.

Cash Flow Stabilization

Any business that has cash flow issues can benefit from hard money lending. Cash flow problems aren’t the same thing as low sales volume. A company can sell more than enough every month but still run out of funds if customers take forever to pay. With a hard money loan, you can cover financial needs while waiting for client invoices to come due.

Loan Deadlines

Can you honestly use a short-term loan to help cover payments on a long-term loan? Yes, if it’s a hard money loan. This type of financing is based on business assets, so it doesn’t hurt your credit to apply at the same time. You can cover the urgent loan payments until your revenue picks up enough to take care of the rest.

Credit Score Problems

Traditional loans — even SBA loans — are tricky to qualify for if you have past credit issues. Most banks won’t even seriously consider your application. With a hard money loan, it’s different. What matters is the value of your asset, not your credit rating.

These are just some of the benefits you can get thanks to hard money financing. To get started, contact us today for more information.

Using Bridge Loans for Mergers and Acquisitions in South Florida

The key to successfully negotiating bridge loan financing with HML Solutions or any other lender involves understanding the terms, structure and timing associated with a bridge loan commitment. Bridge loans are commonly used to finance mergers and acquisitions, but it’s important to analyze the economics of the overall transaction before committing to the bridge loan.

Private equity sponsors or corporations trying to win an acquisition bid may need to get a bridge loan as one of the final steps in the process. But bridge loans can be notoriously complex and could culminate in a variety of potential outcomes. For these reasons, the borrower should be very careful about negotiating with the bridge loan lenders to ensure the terms of the loan are ideal for the situation. When it comes to mergers and acquisitions, the bridge loan terms and costs should factor into the borrower’s acquisition projections.

Understanding Bridge Loans

Unlike long-term loans, a bridge loan is not meant to be a permanent source of financing. Though it is possible for a bridge loan to convert to a long-term form of financing if it is not paid at the end of the initial term, this is not an ideal situation for a borrower to experience. When a bridge loan converts to a long-term loan (usually in the form of a term loan with a longer maturity or a bond), it comes with a higher interest rate than the original bridge loan interest rate. Usually, this higher interest rate is a combination of the rate at the end of the loan’s initial term as well as an added premium.

Before the bridge loan converts into a term loan with a longer maturity or a bond, the loan lenders may require the borrower to pay liquidated damages and file a shelf registration. The liquidated damages usually equate to a percentage of the exchange securities principal amount.

Bridge Loan Fee Structure Terms

Here are a few terms associated with bridge loan fees that borrowers should understand before applying for this type of loan. Understanding these terms helps ensure that borrowers fully understand how bridge loan fees are structured and what is expected of borrowers and lenders who enter into a bridge loan agreement.  

  • Duration Fee: This is a fee that’s added onto the bridge loan’s outstanding balance. The longer the bridge loan is outstanding, the higher the fee can potentially be.
  • Refinancing Fee: If a bridge loan is refinanced before its initial term is complete, a refinancing fee applies. This fee is payable at the time of refinancing and is often equal to the conversion or rollover fee.
  • Commitment Fee: A commitment fee is payable when the bridge lender commits to the bridge loan (whether or not the loan is actually funded).
  • Deal-Away Fee: If you decide to use another source of financing at the last minute (on the closing date), a deal-away fee is applied. This fee is payable to the bridge lenders and is designed to compensate them for any fees they would have received if they had funded the bridge loan.
  • Funding Fee: When bridge lenders fund a bridge loan, the borrower pays a funding fee. This fee is payable on the closing date of the bridge loan. Some lenders may refund part of the funding fee if the bridge loan is refinanced prior to reaching maturity. However, this depends on individual bridge lenders and the time that has passed between the loan’s funding and its repayment. Usually, lenders are willing to refund a larger amount if the bridge loan is refinanced shortly after it is funded. For example, lenders may refund up to 75% of the funding fee if the bridge loan is refinanced within 30 days of its initial funding. If the loan is refinanced within 60 days of the original funding date, the lender may refund 50% of the funding fee. If the loan is refinanced within 90 days of the original funding date, the lender may be willing to refund up to 25% of the funding fee. The outside time frames involving funding fee rebates could potentially be as long as 270 days.
  • Bond Underwriting Fee: A bond underwriting fee is applied when the lender underwrites a bond to replace the bridge loan. Usually, the documentation for a bond offering is kept separate from the original bridge loan commitment.
  • Conversion/Rollover Fee: A conversion/rollover fee is designed to compensate the bridge lenders if the bridge loan converts automatically into long-term financing at the end of its initial term due to the borrower not refinancing the loan beforehand. The conversion/rollover fee is usually equal to the underwriting fee that would be paid to the lenders if the bridge loan had been refinanced before the end of the initial term. The conversion/rollover fee may qualify for a rebate, depending on how soon the loan is repaid after it rolls over into a long-term bond.

To avoid potentially paying overlapping fees, it’s important to pay close attention when negotiating fees related to bridge loans. There are some fees that could overlap in cases of inadequate fee negotiation or failure to pay attention to fee terms. Some potential overlaps include the refinancing fee, which could overlap with the deal-away fee. Similarly, the bond underwriting fee could overlap with the refinancing fee in certain situations. Astute borrowers should be aware of this and negotiate during initial bridge loan discussions to cut back on potential instances of fee overlap.

Long-Term Financing Terms

Experienced sponsors who know how to negotiate commitment letters with at least one lender understand how “market flex” works in fee letters. “Market flex” provisions specify that committing lenders can “flex” particular credit facility terms. When underwriters request the ability to vary long-term financing terms to allow for the placement of long-term debt securities or the long-term credit facility’s syndication, the broad discretion requested can be referred to as flex rights. The scope of a sponsor’s flex rights depends on a variety of factors in capital markets, including leverage, sponsor relationship and issuer credit profile.

Terms that may be subject to flex rights include:

  • Price
  • Financial covenants
  • Senior debt
  • Second lien tranches
  • Financial covenant calculations
  • Maturities

Flex rights are important to understand, as they can impact terms significantly in some situations. Flex provisions apply to bridge loan commitments as well as other loan types.

Securities Demand Provisions

One of the most controversial provisions associated with bridge loan negotiation is called the securities demand provision. This provision allows the lender to require the borrower to refinance the loan by issuing long-term debt securities into capital markets. The investment bank controls the long-term financing timing once the securities demand conditions are satisfied. The borrower does not control when the long-term financing is taken to market.

When it comes to negotiating securities demand provisions, a borrower should be aware of the following negotiation points.

  • Sale Process Requirements: This refers to requests from the borrower to the lender to obtain the best securities offering price (or at least make a sincere attempt).
  • Timing: It may be possible for the borrower to limit the ability of the bridge lender to make a securities demand until after funding of the bridge loan. This provides some bridge funding flexibility in the event that the long-term debt price is higher at the time of closing. It can be difficult to obtain “holiday” periods like these from bridge lenders, though.
  • Number and Size of Demands: Borrowers may attempt to limit the minimum size, frequency and number of each demand. If done successfully, this can limit the costs associated with multiple securities demands.

It may not always be possible to negotiate securities demands to match all the desires of the borrower. But it is worth the effort to see if some of the securities demands can be changed to favor the borrower a little more. If lenders are not willing to negotiate terms to a borrower’s satisfaction, it’s important for the borrower to understand that the lender is also taking a risk by making a bridge loan commitment. The terms should ideally be reasonable for both parties involved in the transaction.

In the case of security demand failure, bridge lenders and borrowers must negotiate potential remedies. Typically, lenders will request the ability to utilize the following options if the securities demand fails:

  • Default under the bridge loan for the duration of the failure
  • Increase in the interest rate associated with the bridge loan
  • Conversion/rollover fee payment
  • Modification of the terms associated with the bridge loan (to include defeasance)

Borrowers may also seek to acquire provisions permitting them to refuse any securities demand that could cause adverse tax consequences to the borrower.

Conclusion

A bridge loan can be very helpful for anyone who needs quick cash for mergers and acquisitions. However, before a borrower signs closing documents on such a loan, he or she should make sure the best economic terms have been sought. The more borrowers understand about securities demands, legal terms and flex key economic terms associated with bridge loans, the easier it will be for them to make financial projections and negotiate limits to minimize financial risk.