A bridge loan is a short-term loan used until a business or firm secures permanent financing or removes an existing obligation. It lets the user meet the current obligations by providing immediate cash flow. These loans are short-term, up to one year, have comparatively high-interest rates, and are usually backed by collateral, like real estate or inventory. These kinds of loans are called bridging loans or bridge financing.
The Features of a Bridge Loan
- Short-term financing is used until a firm or person gets a steady inflow of cash or removes existing obligations.
- It is short-term, typically up to 1 year.
- A bridge loan is usually used in real estate.
- Homeowners can use this loan to purchase a new home while waiting for their old house to sell.
How Does a Bridge Loan Work?
This loan is also known as interim financing, swing loan or gap financing. You can assume by the different names what kind of loan this is. This loan bridges the gap during times when financing is needed but not yet available. Individuals and corporations use this loan, and lenders can customise these loans for different situations.
This loan helps homeowners purchase a new home before selling their old one. Borrowers use the equity in their present home for the down payment of a new home. This type of process gives the owners extra time for the selling of the old house.
Bridge Loan and Real Estate
This loan also plays a vital role in real estate. If buyers have a lag between purchasing one property and the sale of another property, they may turn to a bridge loan. Usually, lenders offer real estate bridge loans to borrowers with good credit ratings and low debt-to-income ratios.
Lenders usually offer this loan worth 80% of the combined value of the two properties, meaning the borrower must have significant home equity in the original property or enough cash savings in hand.
Bridge Loan and Businesses
Businesses need this loan when they are waiting for long-term financing and need money to cover expenses in the interim period. When a new company is doing a round of equity financing expected to shut down in six months, the business will opt for a bridge loan to provide working capital to cover its payroll, utilities, inventory cost, rent, and other expenses until the round of funding goes through.
Bridge Loan and Traditional Loan
Bridge loan has faster application, approval and funding method than the traditional one. These loans tend to have comparatively short terms, high interest, and substantial origination fees in exchange for convenience. Borrowers accept these terms as they need loans with fast and convenient access to funds.
Things to Check Before Taking a Bridge Loan From a Financial Institution
- Experience and rating of the institution
- Their expertise
- Their knowledge in taxation and real estate
- Speed of lending and minimum paperwork
- Reasonable interest rates
- Stating terms and conditions properly
The bridge loan is a vital part of any growing business or an individual trying to buy a house; in fact, it is the best choice they have when they need fast money. Even though interest rates are high and repayment time is less than a traditional loan, one can repay the loan if they have a proper business plan and zero lagging in timely payment.