A bridge loan is the type of short-term loan availed by any individual from the financial institution for a period of time that varies from 2 weeks to 3 years. This type of loan is called bridging loan in the United Kingdom. In some countries, a bridge loan is called Bridging Finance. This loan plays the role of a bridge or to fill the gap between two long term loans. This is an interim or initial loan for individuals, corporate customers or businessmen until the next financing stage can be availed. These loans are more expensive than other conventional loans. The interest rate is high; other costs associated with these loans are higher and they are amortized for shorter periods of time. The companies avail this loan to cover the capital shortfall.
The bridging loans are most availed for the purchase of commercial properties. These loans are generally paid back when the property is sold. A bridge loan may be close or open. Close means that it is being availed for prescribed time or open means that there is no predefined date of repayment.
Some bridge loans can be availed for new ventures and others for different purposes, such as:
- The injection of small amounts of cash in the business so that it doesn’t face cash problem especially when the major contribution is from the owner
- It serves final debt financing to help the company soon after establishment before initial public offering.
- To help large investors in the acquisitions of big deals.
Important Features of Bridge Loans
- A bridge loan can be availed by developers for a project or venture where approval needs to be required. There is no guarantee regarding confirmation of the project. The loan is generally at a higher interest rate possible and from the specific lending institution. Once the project or venture is confirmed, it becomes easy to obtain loans from financial institutions at lower mark-up rates, reasonable amounts and for longer tenors.
- A person wants to purchase a new house and is planning to make a down payment from the sale of funds of the currently owned place. This loan helps a person to take the equity or funds out and pay down payment for the new place.
- A bridging loan also helps with a continuous flow of business.
- To avail the discount offer in the purchase of property.
Availing Bridge Loans
The criterion for bridging loans is easy as compared to other types of loans. The reason relies in the fact that the purpose of most lenders and financial institutions in the case of this loan is just to fill the gap for shorter time periods and at higher mark-up rates. The lenders or financial institutions mostly customize these loans according to the needs of different businesses. This loan is easy and quick to avail and processing time taken is generally less as compared to other conventional loans. One more benefit of this loan is that it can be repaid at any time, and no penalty will be imposed for early payment.
These loans are generally expensive due to higher mark-up rates. Another question is; why would a company want to avail these loans as a solution for shorter terms instead of long term solutions? Since these funds are more easily available, they are consumed quickly. The company has to pay more than usual in such cases. These loans are mostly suited by property dealers, land developers and landlords who can bear the higher mark-up rates. If you are thinking of availing this loan you should be very clear on how this loan can be repaid, otherwise your security can also be damaged. It’s better for you to go to any representative or any broker because he/she will guide you and recommend the bridge or gap according to your needs and circumstances. One more problem with these loans is that most people anticipate more value of their property and when that person comes to know the actual price of the property, they face problems in the repayment process of this loan. It is also a mandatory property to be sold out during this bridge loan period otherwise it will be another source of problem for the owner in what concerns the arrangement of funds.
It can be said that every individual interested in these loans has to be aware of pros and cons of this transaction and his requirements rather than simply going for this loan. There is no doubt about the fact that these loans are expensive and with higher mark-up rates. So the amount to be paid at maturity will be considered before availing these loans.