Bridge loans and hard money are often discussed in terms that make people believe they are one in the same. The two types of loans are very similar, especially when made by the same private lender. Yet, there are a couple of subtle differences that could matter to a borrower trying to achieve certain financial goals.

As you might already know, hard money has been the domain of the private sector from the very beginning. Bridge loans used to be very common in retail banking. They can still be found if you know where to look, but most bridge loans are now made by the same private lenders who make hard money loans.

2 Subtle Differences Between Them

If bridge loans and hard money are so similar, why does it matter which type of loan a borrower requests? It matters because the two factors that set the loan types apart could make a significant difference in a borrower’s strategy. These two differences are:

1. Loan Term

Both bridge loans and their hard money counterparts are short-term loans by design. But bridge loans have the shorter terms of the two.

By nature, a bridge loan is designed to bridge a gap between an immediate financial need and a future revenue source. Lenders typically like to see that lending source in play before approval is given. As such, the terms on bridge loans tend to be in the 6–12-month range.

A hard money loan could be settled through a variety of exit strategies. More on that in a minute. As a result, hard money loans can have terms as long as 24 months. They could still be as short as 6 months, but a full 2 years gives a borrower more time to achieve his exit strategy.

2. The Exit Strategy

The exit strategy is actually the second of the two subtle differences. Let us go back to the bridge loan. It is approved based on an anticipated source of future revenue. Actium Lending out of Salt Lake City, Utah, offers a case study that illustrates the point nicely.

Actium was working with a property investor who specialized in vacation rentals. He had his eye on a new property at the same time he was hoping to sell one of the current properties in his portfolio. Actium provided the funding to acquire the new property. A few months later, when the other property was sold, the investor paid off his bridge loan.

The nature of the hard money loan opens the door to a variety of exit strategies. A scenario could be very similar to the bridge loan case I just explained. But there are other options. Another Actium case illustrates as much.

Actium once closed a deal with an investor looking to obtain a multi-family apartment complex. They financed the acquisition with an interest-only loan that gave the investor time to stabilize the property and then apply for traditional financing. Monthly rental income covered the investor’s interest payments.

Each Situation Is Unique

It’s easy to see from these two examples how the subtle difference between bridge loans and hard money can impact a borrower’s financial strategy. The good thing about private lending is that it is extremely flexible. Even within the scope of pre-defined bridge and hard money loans, lenders like Actium have the flexibility to customize in whatever way necessary to meet a borrower’s needs.

Bridge loans and hard money are similar. But the two main differences between them can make a big difference. Now you know why. Which type of loan best fits your next project?