Typically, bridge loans are not considered ideal for a new construction project. After all, they’re intended as a short-term financing option, which translates to higher interest rates. That’s why short-term re-financing and renovation acquisitions tend to be a better fit for bridge loans. However, there are some situations where bridge loans might make sense for a new construction project.
1. Paperwork delays
It’s natural to want to launch a new location fast. Sometimes the financing paperwork takes longer than expected. Short-term bridge loans can cover the costs until long-term financing can be secured. This way, construction starts on time, the build finishes, and the business starts producing income.
2. Faster buildout
Perhaps the location you’re buying has the necessary infrastructure (sewer, water, parking) in place. If you trust your general contractor to deliver the structure on time, securing short-term financing might help launch the location faster. After all, an empty lot isn’t producing customers. Get the structure in place, then secure long-term financing.
3. Old existing structure
A traditional lender may turn down financing for a building with serious code violations or one requiring serious repair. Perhaps the structure needs to be demolished. In situations like this, bridge loans are often the right choice. Use bridge funding to bring the structure into compliance, or replace with a new structure. Then when finished, obtain permanent financing from a traditional lender.
4. Use existing equity
In the case of transitioning between two structures, you can leverage the equity in an existing structure to finance a new structure. Once the existing building sells, pay off the bridge loan and refinance the new structure. With bridge loans, there are often no early repayment penalties.
Remember, bridge loans typically require repayment within three years. If your project build can finish within that time frame, a bridge loan might be the solution to your funding needs.