Hard Money vs. Bridge Loans: Is It Just Semantics?

It is not uncommon for hard money lenders to offer both hard money and bridge loans. Some would argue they are one in the same. But are they? The fact that private lenders offer both types of loans while banks only offer bridge loans should tell you something. The differences between the two are not just semantic.

What confuses so many people is the fact that both types of loans are short-term – to the tune of 6-24 months. Most hard money and bridge loans go toward real estate transactions, so that’s another point of confusion.

Hard Money Loans and Private Lenders

The first point of distinction between the two types of loans is loan origin. Banks do not make hard money loans. They are restricted by law from doing so. Even if they could legally do it, they probably wouldn’t. Why? Because hard money loans are usually reserved for high-risk projects. Banks do not like taking so much risk.

Hard money loans are the domain of private lenders funded through their own financial resources or resources pooled from multiple investors. Actium Partners is an example of a Utah hard money lender. The firm is based in Salt Lake City and makes loans in Utah, Colorado, and Idaho.

Actium Partners makes hard money and bridge loans on behalf of its investors. They loan out investor funds and then give the returns back to those investors.

Many Ways to Exit Hard Loans

Another point of distinction is how borrowers exit hard loans. We will get to exiting a bridge loan in a moment but, for now, it is enough to know that bridge loan exits tend to be less flexible.

In a hard money scenario, a borrower can exit the loan in any number of ways. Many of Actium’s clients secure hard money to close real estate transactions, then arrange traditional financing to pay off Actium. Others use hard money loans to buy commercial properties, then rely on rents to cover their monthly loan payments.

Exit plans on hard money loans can be just about anything. As long as the lender and borrower agree on a plan, all is well. Things are different with bridge loans.

Bridge Loan Particulars

The third point of distinction is loan purpose. Bridge loans are almost always designated for real estate transactions. Banks and hard money lenders make the loans to individuals looking to buy a new property while simultaneously attempting to sell another. The loan bridges the gap between an immediate purchase and a future sale.

Although hard money loans can be used the same way, they do not have to be. Hard money can be put into property acquisition without a future sale. It can be utilized to facilitate company expansion; hard money can be used to meet a company’s capital expenditure needs.

As for exiting a bridge loan, the loan structure determines how it works. In almost every case, proceeds from the future sale are used to pay back the bridge financing. On the outside chance the borrower fails to sell the property in question, other repayment arrangements need to be made.

Differences In Loan Terms

Last but not least, hard money loans can offer terms of up to two years. Bridge loans are almost never carried for that long. The average on a bridge loan is about six months.

Hard money and bridge loans do have a lot of similarities. But they also have enough differences to make them distinct from one another. The most important thing to know is that banks don’t do hard money. Only private lenders do.