Bridge loans are gaining popularity, and can be helpful for businesses or individuals who have run into serious cash flow issues.
What are Bridge Loans?
A bridge loan is a term in financing that refers to the extension of a line of credit to a borrower for a specific period of time which is usually short. It is also typically done at a very high rate of interest. Bridge loans are short-term financing which bridge the gap between more permanent types and methods of financing. This type of loan is usually used in industries such as real estate, by venture capitalists and some investors. Since this loan is generally more risky than long-term lending options, not all banks offer bridge loans.
Who Can Benefit from Bridge Loans?
Bridge loans can be very beneficial for individuals who seek immediate flow of capital. An example of how it can be useful is a bridge loan acquired by a real estate speculator who is eyeing a piece of property for sale at an extremely good price which he intends to buy and later on pay using a loan with better terms. A bridge loan can also be used in cases of temporary funding shortfalls. Anyone can also use a bridge loan for buying a used car if he has the intent to repay the loan over several months.
How do Bridge Loans Work?
The length of the term of bridge loans varies depending on the lender. Some terms may be as short as two weeks while some can last up to three years. In most cases, collateral, such as something like real estate or business inventory, is offered in order to get a bridge loan. There may also be a high loan origination fee which is separate from the interest and other fees that are included and associated with the bridge loan.
Typically, only large banks which can afford delinquency offer bridge loans. Bridge financing is known to be risky for the lender because the lending bank is not guaranteed that the lender will always be able to pay. There are, however, several banks that gamble on high-risk and high-yield investments. These are the kinds of banks which offer bridge financing.
Before You Get a Bridge Loan
Bridge financing can also prove to be a double-edged sword for the borrower. Because of the great interest rate of the loan, it must be carefully reviewed and considered multiple times before being done. Otherwise, it can become very costly in a short amount of time. Especially for new or first-time borrowers, it is essential that all the fine print is read and all statements are understood.
There are other names that are used to refer to bridge loans. It is also known as swing loan or swing financing. Any offer for bridge or swing loans must be taken into great consideration and with great planning. It is recommended to search for all possible alternatives before acquiring a bridge loan.