The SpareFoot.com website recently reported on a funding deal that saw a local self-storage provider secure nearly $50 million in bridge loans made against three self-storage properties in the greater New York City area. The article seems to imply that the borrower was not in financial straits. Rather, they were looking for some new investments that would help move their business forward.
Although $50 million constitutes a fairly sizable bridge loan, the reasons for borrowing were not all that unusual. Companies looking for bridge loans generally have very specific needs in mind. They are looking for short-term financing capable of helping them achieve their goals without severely hampering cashflow.
There are as many reasons for borrowing as there are borrowers. For the purposes of illustration, two economic reasons are explained below. One or both may explain why the self-storage provider in New York sought out so much financing.
Bridge Loans to Release Equity
Actium Partners, a Salt Lake-based private lender that does bridge loans across the country, explains that one of the chief economic reasons for seeking a bridge loan is to release a commercial property’s equity. That may have been the case in the recent self-storage deal.
A company may have financed its property years ago. After many years of paying on those loans, they now have a certain measure of equity locked up in the property. It is no different than building equity in residential property. But to a business, equity represents overhead. It is money locked up in property when it could otherwise be used to facilitate growth.
A set of strategic bridge loans can release that equity by paying off the remainder of the company’s existing financing and simultaneously putting extra cash in the bank account. That extra cash can be used to facilitate the growth that drives the revenues the company will use to pay off the loan. The same growth will fuel more revenues and profits in the future.
Eliminating Personal Responsibility
Another concern of many business owners is being personally responsible for outstanding debts. Rather than trying to release equity, the business owner wants to pay off existing loans so as to clear his or her name from loan obligations. Doing so reduces the risk to his/her personal assets in the event the business falls on hard times.
Such thinking is fairly normal at the current time. Many small business owners remember all too well what happened during the financial crisis that began back in 2008. Not only do they want to limit their own financial exposure, they also do not want to find themselves under water should another economic downturn be right around the corner.
It is All About Property Value
There are very solid economic reasons explaining why small- and medium-sized businesses would seek out bridge loans to pay off existing debt. But why would private lenders get involved? Why pay off existing debt only to establish new debt? For lenders, it is all about property value.
Bridge loans are typically offered against borrower collateral. And more often than not, that collateral comes in the form of existing real estate assets. Lenders are smart enough to know that it’s hard to lose money on real estate, especially if they are willing to be patient.
As such, a piece of real estate valuable enough to cover the cost of the loan gives lenders incentive to make deals. As long as borrowers repay on time, lenders get all of their money back, and then some. If borrowers default, the value of the collateral will cover for the amount borrowed.