Monday 15 April 2024
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Sometimes Bridge Loans Are a Matter of Economic Necessity

Sometimes Bridge Loans Are a Matter of Economic Necessity

It is not uncommon for SMEs and real estate investors to approach Utah-based Actium Partners in search of bridge loans. They are looking to borrow in order to finance short term needs that are not necessarily critical to keeping operations going. But that is not always the case for bridge loans. Sometimes borrowing is a matter of economic necessity.

A case in point is Florida’s agricultural sector. Businesses in the Sunshine State’s panhandle region are still reeling 10 months after hurricane Michael devastated the coast with a level of destruction that has not been seen since 1992’s hurricane Andrew. Going into the 2019 growing season, agricultural operations in the region are facing an uphill climb.

Emergency Bridge Loans to Help

So what does an agricultural operation in Florida do with devastated property and no money to bring it back up to standard? It asks for help. That help has finally arrived in the form of small business emergency bridge loans made possible through a partnership between several state agencies and Florida First Capital Finance Corp.

The partnership is providing hard money financing to the worst off among those agricultural entities that suffered the most at the hands of Michael. The state expects millions of dollars in bridge loans to flow into Northwest Florida in the coming weeks and months. The loans will help agricultural operators get back on their feet even as the 2019 hurricane season gets underway.

The good news for borrowers is that these bridge loans are being offered interest-free. The money still has to be repaid, but it will cost borrowers nothing to obtain funding. That’s good news to business owners already dealing with enough financial stress.

How Bridge Loans Work

A typical bridge loan is designed as a short-term loan to meet immediate financing needs. A loan made by an organization like Actium Partners would typically be for a couple of million dollars or less. Borrowers have up to a year to repay the loan and any interest due.

Bridge loans from private lenders are almost always tied to real estate assets. The lender requires a piece of property be offered as collateral, then determines how much to loan based on the value of that property. The property can be repossessed and sold in the event of default.

Bridge loans made by banks are also made against tangible assets. But those assets do not necessarily have to include real estate. A bank could lend on collateral covering everything from business equipment to inventory. The biggest difference with banks is that their lending criteria tends to be a lot more involved.

Interest on Bridge Loans

Interest payments are where the Florida agricultural operators are coming out ahead. Why? Because interest rates on bridge loans are higher than other forms of commercial credit. They have to be to account for the fact that loan terms are so short.

The thing is that lenders make money on interest payments. The longer the term of a given loan, the more money there is to be made. That’s why lenders are more receptive to offering lower interest rates in exchange for longer terms. But because the term of a bridge loan is so short, profit has to be made on higher interest rates.

At the end of the day, some bridge loans are made to cover expenses that are not critical to a business’s existence. Other times, business owners are depending on the hard money from bridge loans to keep operating. They need that money, or they may have to go out of business altogether.