A bridge loan is a type of short-term loan,
typically taken out for a period of 2 weeks to 3 years pending the
arrangement of larger or longer-term financing. It is usually called a bridging loan in the United Kingdom, also known as a "caveat loan," and also known in some applications as a swing loan.
What is a 'Bridge Loan'
A bridge loan is a short-term loan used until a person or
company secures permanent financing or removes an existing obligation.
This type of financing allows the user to meet current obligations by
providing immediate cash flow. The loans are short term, up to one year,
with relatively high interest rates and are usually backed by some form
of collateral such as real estate or inventory.
BREAKING DOWN 'Bridge Loan'
Also known as interim financing, gap financing or swing loans,
bridge loans "bridge the gap" during times when financing is needed but
is not yet available. Both corporations and individuals use bridge
loans, and lenders can customize these loans for many different
situations.
How Do Businesses Use Bridge Loans?
Businesses
turn to bridge loans when they are waiting for long-term financing and
need money to cover expenses in the interim. For example, imagine a
company is doing a round of equity financing expected to close in six
months. It may opt to use a bridge loan to provide working capital to
cover its payroll, rent, utilities, inventory costs and other expenses
until the round of funding goes through.
For
example, when Olayan America Corporation wanted to purchase the Sony
Building, it took out a bridge loan from ING Capital. The short-term
loan was approved very quickly so Olayan could seal the deal on the Sony
Building quickly. The loan helped to cover part of the cost of
purchasing the building until Olayan America secured more permanent
long-term funding.
How Do Bridge Loans Work in Real Estate?
Although
rare, bridge loans sometimes pop up in the real estate industry. If a
buyer has a lag between the purchase of one property and the sale of
another property, he may turn to a bridge loan. Typically, lenders only
offer real estate bridge loans to borrowers with excellent credit
ratings and low debt-to-income ratios. Bridge loans roll the mortgages
of two houses together, giving the buyer flexibility as he waits for his
old house to sell. However, in most cases, lenders only offer real
estate bridge loans worth 80% of the combined value of the two
properties, meaning the borrower must have significant home equity in
the original property or ample cash savings on hand.
What Are the Differences Between Bridge Loans and Traditional Loans?
Bridge
loans typically have a faster application, approval and funding process
than traditional loans. However, in exchange for the convenience, these
loans tend to have relatively short terms, high interest rates and
large origination fees. Generally, borrowers accept these terms because
they require fast, convenient access to funds. They are willing to pay
high interest rates because they know the loan is short term and plan to
pay it off with low-interest, long-term financing quickly.
Additionally, most bridge loans do not have repayment penalties.
We
help our clients achieve their dreams by creating specially tailored
funding solutions including commercial bridge loans, hard money loans,
secured loans, unsecured loans etc.
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