Hard money and bridge loans from private lenders represent two forms of financing offered as alternatives to traditional bank financing. The two terms are often used interchangeably in the retail sector. However, they are two separate entities; hard money loans are not the same thing as bridge loans.
Much of the confusion in the retail sector can be attributed to the fact that hard money and bridge loans are nearly exclusive to real estate transactions. But in the commercial sector, private lending spans a much broader scope of needs. It is in the commercial sector that we can more easily distinguish between hard money and bridge loans.
What Is a Hard Money Loan?
A hard money loan is a privately funded loan secured by some form of collateral. Actium Partners, a Salt Lake City hard money specialist, explains that real property acts as collateral in the vast majority of hard money transactions. For example, a real estate developer might offer the property being purchased as collateral for hard money funding.
That being said, real estate doesn’t have to be the only collateral for a hard money loan. You might have a small business looking to expand by opening a second location. The business owner offers existing business equipment as collateral for a hard money loan. As long as the equipment has enough value, a private lender might be willing to write a loan.
In short, a hard money loan is a private loan secured by collateral. The collateral has enough value to cover the loan in the event of default.
What Is a Bridge Loan?
A bridge loan is a specific kind of loan intended to bridge the gap between traditional financing sources. Commercial land development offers a perfect example here. Consider, if you will, a land developer that secures a $1 million construction loan to build a new office building.
Once the building is complete, leasing commences. Let us say the developer only has the building leased at 65% when his construction loans come due. The property isn’t yet generating enough revenue to satisfy the loans. He applies for a bridge loan, anticipating that the building will be fully leased within six months. Bridge financing goes to pay off his construction loans.
Bridge loans in the consumer market are not as common. When they are made, it is almost always to bridge the gap between selling one home and buying another. A bridge loan pays off the existing mortgage and sometimes provides a little extra to put towards the new property.
How Do Lenders Make Their Money?
A common characteristic of all hard money and bridge loans is their short-term nature. Bridge loans are typically made for six months to a year. Hard money loans are generally written for one to three years. Compared to traditional bank financing, terms of three years or less is extremely short. This leads people to wonder how private lenders make their money.
Private lenders make their money on interest, just like banks. But they have to charge higher rates in exchange for shorter terms. Thus, hard money and bridge loans are more expensive than traditional bank financing – at least in terms of straight interest rates. In real terms however, that might not be the case. Shorter terms may end up costing borrowers less by reducing total interest paid.
Hard money and bridge loans are similar in many ways. However, they are two distinctly different types of loans. Hard money loans are private loans backed by collateral while bridge loans are private loans intended to bridge the gap between financing sources.