To understand the nuances that distinguish open and closed commercial bridging loans from one another, we need to first understand what a commercial bridging loan is. In summary, it is financing that is backed by property and that is short term in nature. This allows businesses to find other options that will be more suitable to their goals in the long term, and this can include procuring a loan from another institution or to sell their property.
These agreements usually last between one and eighteen months. Interest is rolled into the total, and this gives startups the freedom to pursue other endeavors. Application approval can occur in as soon as five to fourteen days, and these arrangements are often used to acquire auctioned properties or to help fund houses that are uninhabitable or that require restoration.
Open and Closed Bridging Loans
An exit strategy is integral to the agreement that is reached between the two parties. This will be disclosed at the application stage, and it can include the sale of a property, obtaining other financings, or paying the debt in full from another source.
The open commercial bridging loan will not have a determined period within which it will need to be paid. The borrower can decide how much to allocate toward repayment, and the business can also determine when these payments are to be made. In addition, the lender will also have a clear idea of how the borrower will intend to pay the money back. Their exit strategy need not be so clearly outlined for a closed loan.
A closed commercial bridging loan will have a set date when the conditions will expire, and the remaining balance will be due in full. In addition, both parties will need to be confident in the client’s ability to meet stated goals. This can mean that if the contract ends when a property is sold, you will need to set this deadline as occurring prior to the date the last payment is due.
Other differences are cost, as open-ended loans will most often carry higher rates of interest. This is because there is a greater liability in backing this particular instrument, making this choice more expensive for the borrower.
In addition, however, there are no penalties involved with acquiring an open-ended loan. This is because there is no way to miss the deadline for repayment, as there simply isn’t one. Closed-ended loans do carry fines for not making the payment on time.
Closed bridging loans are typically not as flexible as an option. This can make the open-ended variety more attractive, especially if there is difficulty in pinning down a specific timeframe in which to sell a property. This also allows you some wiggle room if your income fluctuates or if you’re dealing with factors that make the timeline unusual or more subject to change.
Closed loans will typically be easier to secure than an open loan, as lenders will more willing to extend financing to businesses that have a well-planned strategy toward repayment. This will require that you obtain a degree of paperwork in order to provide proof of your ability to repay.
It will be necessary for you to check all the fine print, as this industry is unregulated, and you’ll need to make sure there are no hidden fees. In conclusion, the loan that is right for you will depend on a variety of factors.
Fidelman & Co. specializes in management consulting, presentation advisory, and financial modeling. We focus on building businesses alongside entrepreneurs and investors. Contact us today for more information about what we can do for you on commercial bridging.