What To Know About Using Bridge Loans for Construction Projects

What To Know About Using Bridge Loans for Construction Projects

It has always been important to have sufficient financing for construction projects in Florida. Whether your business focuses primarily on residential construction and remodeling or commercial development, having access to significant financing can help you reach your deadlines on time.

What has changed in the last decade are the type of loans business owners, real estate businesses, contractors and fix-and-flip businesses choose. It’s becoming increasingly common for companies to use bridge loans for construction. Why are bridge loans popular for this purpose and what are the benefits?

Short-Term Financing for Construction Projects?

One reason why it may seem surprising to see bridge loans on the construction scene is that bridge financing is for short-term needs only. The higher interest rates of hard money loans and other asset-based financing means that you generally want to pay them off as quickly as possible. Usually, for a long residential or commercial development project, conventional mortgages or SBA loans are the options of choice.

Bridge financing started popping up as developers realize that traditional term loans are too rigid to be the only source of funding for construction. You can save money with the lower interest rates, but it’s hard to adapt to the unexpected situations that tend to appear at any construction site in Florida. That’s where the speed and flexibility of asset-based financing truly excel.

Situations When a Bridge Loan Can Save Your Construction Project

These days, the construction process isn’t as easy to plan as in the past. Countless problems or surprises can appear and leave contractors looking for capital. Here are some of the times when you’ll be glad to have bridge financing by your side.

Unexpected Issues With Land, Permits or Homes

Contractors and real estate developers do their best to perform due diligence before breaking ground, but that doesn’t stop unexpected issues from appearing. This situation is common with remodeling projects, fix-and-flip projects, and construction.

Sometimes, providing adequate drainage is more time- and resource-consuming than anticipated. Homes being remodeled may unexpectedly reveal mold problems that are costly to remove. City ordinances may change or permits may take longer than expected to acquire.

In all of these situations, it’s possible to quickly obtain a bridge loan to cover expenses and get the project back on track. The additional interest is a small price for meeting your work deadlines and getting paid.

Rising Materials Costs

Calculating the costs of construction materials is practically an art. These estimates are important for making sure your initial loan is sufficient to cover the full costs of materials during the project. Unfortunately, even the best-laid plans can change if the market increases the costs of certain items overnight. Everything from cement and timber to hardwood cabinets and appliances can shift rapidly based on global supply-chain issues.

Change In Construction Project Scale

The client is always right. That’s still true even if the client suddenly decides to increase the size, style or structural details of the project. How can your business adapt to these sudden changes? A bridge loan can help you cover the difference between the original budget and the new one.

This situation is very common with home building in Florida. New homeowners often have a desire to enjoy the house of their dreams. As the project advances, they may realize that certain layouts or details aren’t what they envisioned. With flexible financing, contractors can adapt to changes in the kitchen, living room, patio and other spaces.

It’s not just contractors that can benefit. Real estate developers should also have a source of financing that reacts to on-the-spot decisions. There are times when it becomes apparent that certain changes are for the good of the project, boosting property value and revenue significantly.

Budget Issues

Even experienced real estate businesses can have budget problems, but this situation is more common with new property investors and house-flippers. Until you have a few construction projects under your belt, it’s not easy to accurately predict how much you’ll need to complete a project. A common tip is to plan your budget, add 50% for unexpected costs and add another 50% to that for good measure.

The good news is that all isn’t lost if you accidentally blow through your construction budget halfway through the project. You can get a bridge loan to successfully bring the project to completion and reap the financial benefits.

Slow Projects

When a project is doable with your team, it’s easier to gauge work speed and delivery times. Things are more difficult with large-scale residential or commercial construction projects. These builds may require coordinating efforts with dozens of different subcontractors. You need to manage electrical, plumbing, HVAC and countless other specializations.

In this situation, it’s common for things to progress more slowly than expected. Sometimes, this is due to weather issues. Often, it’s the human factor. In any case, the longer the project takes, the higher the labor costs. Bridge loans give you a buffer to adapt to delays and hire additional personnel as needed for successful completion.

Heavy-Equipment Repairs

One of the most dreaded things that can happen on a construction worksite is equipment breaking down. If your team relies on that piece of heavy machinery to get the job done, suddenly everything comes grinding to a halt while repairs are scheduled. This can negatively affect any construction business, from small teams to huge companies that perform municipal work.

Bridge financing can help with this situation in several ways. First, you can use the funds to pay for repairs that are outside of your project budget. Second, the financing can also help you absorb the cost of renting replacement machinery in the meantime to keep your workers on the job. That way, other teams don’t fall behind because of the stoppage of a single area of the construction project.

Multiple Construction Projects

Large real estate developers, and even some medium-sized construction businesses, often have several projects going simultaneously. Doing this can help you maximize your profits, but it can also play havoc with your cash flow if you’re not careful.

Keeping your working capital available depends on a careful dance of customers paying and setting money aside wisely for the next project. House flippers face similar challenges related to how quickly the previous home sells.

Gap financing is an incredible tool for helping with cash flow for any business. It’s perfect for providing extra capital when you need it. As soon as you get paid or sell a home, you can use part of the proceeds to pay off the bridge loan.

The Benefits of Bridge Financing for Construction

How does construction financing with bridge loans stack up against traditional loans? There are numerous advantages as well as a few disadvantages. First, let’s go over the pros:

  • Fast financing: Construction businesses and fix-and-flip businesses can get approved for a bridge loan quickly. The average time for approval is a week, but sometimes it only takes a few days. In any case, you can get funds much more quickly than with a long-term loan. Even working capital loans from banks usually require several weeks to get approved.
  • Easy qualification: The loan application for bridge financing is a breeze compared to traditional loans. Forget about having to provide endless copies of balance sheets and business reports. You just need to show basic business documents and information related to the construction project.
  • Low credit score requirements: Unlike traditional mortgages, bridge loans don’t require exceptional credit for qualification. Small construction businesses and large developers can apply equally. Even past credit problems aren’t an obstacle; it’s possible for companies that went through bankruptcy in the past to qualify.
  • Amazing flexibility: One of the most popular features of gap financing is that it comes with no strings attached. No one tells you how you have to use the capital or when. There is no deposit schedule requiring the release of funds in small portions as the project advances. Instead, you get the full funding amount right away to use however you see fit.
  • Customizable loan terms: As experienced alternative lenders, we can offer terms that are much more flexible than traditional banks. You don’t have to deal with endless layers of red tape to get the working capital you need. We can customize the repayment terms of your loan so payments are comfortable for your business’s operations.

What about downsides? There’s a tradeoff with any type of financing, and bridge loans are no different. The incredible flexibility, speed and accessibility of gap financing mean that interest rates are higher to compensate for the increased risk for lenders.

For many real estate companies, this cost is well worth the benefits provided. You should analyze your project to weigh the pros and cons before making a decision.

Trustworthy Construction Project Financing in Florida

At HML Solutions, we have an excellent reputation with contractors, fix-and-flip companies, real estate developers, construction businesses and other companies. We provide great rates and terms that adapt to your project goals. Above all, our team is committed to helping your business at every step. We’re happy to answer your questions and help you select the right loan options for your current needs. Contact us right away to learn more.