Bridge Loans in Illinois: What They Are and How They Work

How does a Illinois Bridge Loan Work

A bridge loan is essentially a short term loan to get you from point “a” to point “b”. Also known as interim financing, gap financing or swing loans. Basically bridge loans bridge the gap during times when financing is needed but not yet available.

Both businesses and individuals use these bridge loans for different reasons. Lenders like us, customize these loans to help you get through that situation without adding any extra leg work.

Bridge Loans Also Known As

• Interim Financing
• Gap Financing
• Swing Loans

Example of a Bridge Loan in action

When Olayan America Corporation wanted to purchase the Sony Building in 2016, it took out a bridge loan from ING Capital. The short-term loan was approved very quickly, allowing Olayan to seal the deal on the Sony Building with dispatch. The loan helped to cover part of the cost of purchasing the building until Olayan America secured more-permanent, long-term funding.

Again, the Bridge loan provides the immediate cash flow needed to make this deal happen.

Pros and cons of Illinois bridge loans

As with any loan product, bridge loans have potential advantages and potential disadvantages for borrowers. Before applying for any kind of loan, it's important to understand and weigh the pros and cons.

Pros of bridge loans

There are a few reliable pros for opting to get a bridge loan. It's you're looking to get some quick cash for purchase inventory or make upgrades now.

• Faster financing: The application process and closing on a bridge loan typically takes less time than other types of loans.
• There's no need to relinquish control of your business.
• It'll help you navigate long payment cycles

It's a Quicker Way to Obtain Financing

The application, approval, and funding process for bridge loans is typically much faster than it is with a traditional loan. Thanks to this expedited process, your business can quickly receive financing to purchase equipment, pay for inventory, or meet payroll.

Bridge financing is especially vital if you need to complete a job or are trying to bid on additional projects. Whether it's to buy real estate or purchase another business, Illinois bridge financing gives you a leg up on other bidders because you can close faster.

There's No Need to Relinquish Control of Your Business

It's common for business owners who are waiting on cash to turn towards short-term financing through one of their equity partners. However, part of the deal they often strike is a greater stake in the business for their partner.

Bridge loans are a short-term financing solution, so you won't need to turn to partners. In addition, you can maintain as much control of your business as possible. In this regard, it's a win-win!

It'll Help You Navigate Long Payment Cycles

According to research firm CB Insights, the second most common reason for a startup's failure is cash flow problems. This is troublesome, because even if you're running a healthy business, you may still be susceptible to running out of cash.

When a healthy Illinois business runs into a cash flow problem, it's often caused by long payment cycles. For example, if you own a construction business, you might get paid at the beginning and end of a project. In the interim, you'll still need cash to complete the project and afford other business expenses.

To solve this problem, you could use bridge financing to gain access to cash which will cover your upfront expenses while you're waiting for payment.

Cons of bridge loans

While bridge loans can be beneficial for a variety of situations, there are some negatives to this type of loan that you should consider before applying for one.

These cons include:

• High interest rates: Since lenders have less time to make money on a bridge loan because of their shorter terms, they tend to charge higher interest rates for this type of short-term financing than for conventional loans.
• Origination fees: Lenders typically charge fees to “originate” a loan. Origination fees for bridge loans can be high — as much as 3% of the loan value.
• Equity required: Because a bridge loan uses your current home as collateral for a loan on a new home, lenders often require a certain amount of equity in your existing home to qualify, for example 20%.
• Sound finances: To be approved for a bridge loan typically requires strong credit and stable finances. Lenders may set minimum credit scores and debt-to-income ratios. Generally speaking, if your financial situation is shaky, it could be difficult to get a bridge loan in Illinois.

Payments May Be Larger

The terms of bridge loans generally range from 3 to 18 months. Due to this, you'll be making larger monthly payments than you would for other business financing products. If you have plenty of cash to make the payments, this is just a slight disadvantage. However, if you're late on your payments, penalties and interest can pile up.

It Can Be Risky if Future Payment Falls Through

If you've taken out a bridge loan, you may be anticipating future payment, especially if you're about to finish a job. Unfortunately, if you're planning on using the proceeds from the payment you're anticipating, and that payment falls through, you could be stuck with a large, unexpected expense. Even worse, you could find yourself with significant debt to income ratios, making it challenging to run your Illinois business.

However, this doesn't happen often. According to U.S. News, less than one or two percent of bridge loans have issues. Still, every loan has risk, so it's worth considering before you make any commitments.

There May Be Higher Interest Rates Relative to Traditional Loans

Since bridge financing is meant to be a short-term loan, you won't be paying interest for as long as you would be if you took out a traditional loan. To make up for this, some lenders will charge a high interest rate on bridge loans. So, while you may pay less interest in total for a bridge loan, you'll likely pay interest at a higher rate.

It's also not uncommon for lenders to charge extra fees on bridge loans. These fees can include origination fees, in addition to closing costs and fees.

Businesses and Bridge Loans in Illinois

Businesses turn to bridge loans when they are waiting for long-term financing and need money to cover expenses in the interim. For example, imagine a company is doing a round of equity financing expected to close in six months. It may opt to use a bridge loan to provide working capital to cover its payroll, rent, utilities, inventory costs, and other expenses until the round of funding goes through.

Illinois Bridge Loans in Real Estate

Bridge loans also pop up in the real estate industry. If a buyer has a lag between the purchase of one property and the sale of another property, they may turn to a bridge loan. Typically, lenders only offer real estate bridge loans to borrowers with excellent credit ratings and low debt-to-income ratios. Bridge loans roll the mortgages of two houses together, giving the buyer flexibility as they wait for their old house to sell. However, in most cases, lenders only offer real estate bridge loans worth 80% of the combined value of the two properties, meaning the borrower must have significant home equity in the original Illinois property or ample cash savings on hand.

Bridge Loans vs. Traditional Loans

Bridge loans typically have a faster application, approval, and funding process than traditional loans. However, in exchange for the convenience, these loans tend to have relatively short terms, high interest rates, and large origination fees. Generally, borrowers accept these terms because they require fast, convenient access to funds. They are willing to pay high interest rates because they know the loan is short-term and plan to pay it off with low-interest, long-term financing quickly. Additionally, most bridge loans do not have repayment penalties.

The Bottom Line on Illinois Bridge Loans

Bridge loans can be an invaluable tool for small business owners, helping to address cash flow emergencies before they snowball into bigger issues. Securing a bridge loan is fast, easy, and offers a temporary fix for just about any financial mishap. While they may be more expensive than traditional financing, the initial investment needed to take out a bridge loan can help a small business to ensure a successful future.

The Most Common Uses for Bridge Loans

Bridge loans are versatile enough to be used across a wide variety of industries, from service to manufacturing. They can be used to address just about any short-term cash flow problem that may affect the future success of a business. Here, we go over some of the most common cases where bridge financing can come into use.

Buying Illinois Real Estate

Buying commercial real estate can be a challenge, especially when different parties are competing for a prime spot. Illinois Businesses need to act quickly if they're going to land a desirable real estate deal. However, many small businesses don't have the capital lying around to afford a property upfront. What's more, it can be difficult to gain approval for a traditional bank loan.

Fortunately, bridge loans give businesses the option to get their hands on cash in as little as a single day. This allows the company to secure a property that will boost its future revenue, thus paying for itself. Often, a business will refinance the bridge loan after landing the real estate deal with more economical long-term financing.

Fixing Up a Property

Sometimes, a business isn't able to secure a long-term mortgage because a commercial property doesn't meet the strict requirements of potential lenders. However, it can be expensive to bring a building up to code.

Small businesses can take out a bridge loan if they need to fix up a property before applying for long-term financing. Once they've made renovations, they can refinance the bridge loan with a traditional, long-term mortgage.

Keeping Businesses Afloat

Many small businesses need a large investor or acquirer to survive in today's corporate atmosphere. However, it can take months or even years for a company to attract the attention of a financier.

To avoid cash flow issues while looking for an investor, small businesses can take out a bridge loan. Doing this helps to cover costs such as rent, utilities, wages, and more. Eventually, it will be paid back by investor funds.

Starting a Business

Bridge loans are ideal for those who are starting a new business and don't have a significant source of revenue yet. It can help to cover their costs as they become established and create a customer base. Once the business begins to net money, the owner can pay off the bridge loan.

Bridge loans can be especially helpful for those entering manufacturing. Companies typically don't get paid until after they've shipped a product, leaving them responsible for initial costs. A bridge loan can help to cover expenses such as materials and labor, and it can be repaid upon delivery of the goods.

How to Refinance a Bridge Loan in Illinois

Not all business owners plan to pay a bridge loan off in the given period. Often, they plan to switch over to a long-term financing option instead. Long-term loans tend to have more favorable terms, such as lower interest rates and fewer fees.

The purpose of a bridge loan is primarily to get your hands on some quick cash. Traditional loans can take days or even weeks to process, and they often have strict qualification credentials for small business owners.

Once you've used the funds from a bridge loan to fix your cash flow situation, however, it can be more economical to spend time switching over to a long-term loan instead. This is especially true of business owners who don't expect an influx of extra cash anytime soon.

You can do so by refinancing your bridge loan. If you meet the qualifications, you can turn to a lender such as a bank to work out a more favorable long-term solution to paying off what you've borrowed.

If you can't gain approval with major lenders, there's no need to worry. You can always consider a small business loan, or SBA loan, as an alternative option. This type of financing is backed by the government, making it a low-risk option for lenders. This allows them to give money to small business owners who don't qualify for traditional loans.

SBA loans are often larger than bridge loans, sometimes reaching up to $5 million. They also have much longer repayment terms, often ranging up to 25 years. Because they're low-risk, lenders are able to charge lower interest rates than they might otherwise.