One of the great truisms of business—or any valuable opportunity—is to “strike while the iron is hot.” It simply means that there is a frame of time which, if you act quickly enough, will get you maximum results. While the saying comes from the blacksmith days of hitting metal at its hottest point in order to bend it into the shape or configuration you want, this kind of thinking often applies to business as well.
The problem in business, however, is that often, while the timing of a deal or business opportunity may be fantastic, there are many factors going against you that can impede your progress. You may, for example, find a property which you know will be a valuable investment that will give you great returns. You may even have access to a limited time deal in the property that would net you great savings in the immediate future, while guaranteeing higher profits in the long run. However, the amount of time it would take for you to get your finances in order and presentable to the bank for a loan, and the subsequent time it would take for the bank to approve that loan, may make you lose this chance.
This is where a bridge loan comes in.
Risk & Return
A hard money bridge loan is, as the name implies, a way to gather financial resources together in a hurry if a business opportunity is time sensitive. This is a short term loan, with higher points and interest rates than a typical bank loan, but part of the reason for that is the expectation that the loan will be paid back in full in short order anyway.
For example, if a purchase on a property needs to happen very quickly, but the bank loan—which you know you will get—is going to take too long to arrange, then a hard money bridge loan is the answer. Once you go to a hard money lender, explain your case and outline the value of this project, you can get a loan based on that project value.
With the loan secured, you can go ahead and start on developing your property project, and still work closely with your more traditional financial routes, such as backing from a bank loan. It may even be easier to get the bank loan now that the bank is aware the project is already underway and making progress. Once the bank loan has been secured, you can now pay back the bridge loan, and continue as per normal, with your usual financial relationship with your bank.
A bridge loan is not a scam, nor is it intended to be a way to surreptitiously grab property or a company from a business owner. It is merely a higher risk, higher interest form of loan that exchanges lower risk and rates for faster results on the understanding that this is a financial stop-gap measure to move forward with longer term, stable financial opportunities.