Bridge Loan Issues – Analysis

Many clients seeking project financing commonly ask for “Bridge Loans”. Usually meaning simply a smaller loan for a preliminary stage of the project, before they can prepare or qualify for, or obtain a fully capitalization loan. While “Bridge Loans” are much in demand, and frequently requested by clients and brokers, there is a very compelling reason why that loan is very difficult for financial institutions to reliably arrange as part of Funding Support services.

Bridge Loan Issues and Challenges

Technically, a “Bridge Loan” is literally a “loan against a future loan”. The only way to really get one is to prove to the Bridge Lender that you have a real, solid, binding Loan Commitment for the full project funding loan. This is necessary to show the lender that there is a certainty that the project launch will be completed, and thereby revenues will be generated allowing repayment of the loan.

Unfortunately, most institutional lenders refuse to give “commitments” like that anymore. (They are more likely to give you the actual money before they would give a “commitment” letter.) Major changes in banking laws and regulations since 2006 made it extremely for banking and financial institutions to give any “commitments, “terms sheets or even “LOI” unless a specifically identified collateral, proven revenue stream, or binding exit strategy is already in place, and the project is fully underwritten, certified and bankable.

Of course, if the client already all those advantages, then it would be qualified to immediately be approved for the full project loan and would thus not need the “Bridge” loan for only a preliminary stage. As a result, it is commonly considered “easier” to get the whole project loan for 100% of working capital, and get the actual money, than to ever get “only a commitment” just to prove what is required to get any “Bridge Loan”

The only exception to this dilemma is if the client already has a solid, binding, verifiable Loan Commitment for the full 100% project capital from a lender, and in fact, is looking for an actual “Bridge Loan” in the proper sense of its original meaning. (Since institutional lenders generally refuse to give “commitments”, this is possible usually only if the lender is a private fund source. If there is come a special pre-established relationship between the client and lender, and more often when an institutional lender commits to funding but gives a remote funding date of many months later.

In the rare and unexpected case of the client already holding a real commitment, most financial services professionals and firms are unprepared to help. The reason is that many clients seeking “Bridge Loan” are not qualified, making it impossible to obtain, so services providers usually do not make any efforts to develop a network of Bridge Lender sources. The holder of a legitimate Loan Commitment, however, would or should be to use that as the basis for a Bridge Loan or ordinary advance or factoring loan with almost any available source, without needing the help of any intermediaries or financial services.