As a mortgage broker in Victoria BC, I’m often asked what the difference between bridge and mezzanine loans is. Financial jargon can be difficult to understand for someone not well-versed in the world of loans and finance.
For those of you who may not be familiar, bridge loans and mezzanine loans are two common financing options that are available to entrepreneurs or small business owners. When you’re in need of immediate cash on a short-term financing basis, these loans are something you should consider.
Although they’re similar, there are big differences between a bridge loan and a mezzanine loan. Being a mortgage broker, it’s important to educate my clients on loans like these. To help you understand the differences, I’ve outlined them below so you can see which may be the better option for you.
A bridge loan helps “bridge” the financing of an entrepreneur or business owner while they’re obtaining an extended, more permanent financing solution. These types of loans are usually used in real estate transactions for a specific reason. If someone who invests in real estate is selling a home, the investor may need capital immediately until the sale is finalized. This will allow an investor or business owner to be able to cover short-term costs and expenses. After the sale is finalized, the investor who borrowed the money can repay the lender. Bridge loans are used to cover expenses for a short period of time only, usually about a month, but it can cover you up to one year. If you require further financing, you’ll want to consider another option. The reason being because bridge loans are usually backed by collateral. Once the property sale is over, that collateral no longer exists.
A mezzanine loan is basically a type of bridge loan, also used to provide short-term financing for entrepreneurs and small business owners, but with one key difference. Mezzanine loans are not supported by using property as collateral. When you have a mezzanine loan, the lender is allowed to convert ownership of the borrower’s company if a situation occurs where the borrower defaults or is unable to pay. This means you’re going to have to put a portion of your company’s equity up as collateral when you get a mezzanine loan. Presumably, if you pay back the loan in the manner the contract dictates, this won’t have any negative effect on your company. If you don’t, however, then the lender of your mezzanine loan will get part of your company’s equity. Mezzanine loans also often have high interests rates usually between 12% and 20%, which may be another downside to this type of loan. Having said that, the interest you pay on mezzanine loans are tax-deductible.
Now that I’ve given a little bit of detail into the difference between both types of loans, it’s up to you to decide which one would best suit you. If you’re still unsure, let me guide you through the decision-making process. As a mortgage broker, I’ll make sure you select the loan that would be most advantageous to you. Contact me today.
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