We know “bridge” is known as the pathway to cross someone from one part to another part of a city or village without closing the way underneath.
So the bridge loan is something like that; it is a short form of a loan secured by your home to solve some short term transactions in a shorter period. You can also call it a swing loan.
When you are running a company, and your Quick balance is running out for a long term project, now you want some quick money.
The bridge loan takes place over there and saves your company from bearing the expenses, and makes you survive till you get another source of money from anywhere else.
It can be used in the case of having a new home.
What are the terms and types?
A bridge loan is a short term loan that is used to be temporary financing to invest your money in short term projects by mortgaging your current property.
This type of loan does not exceed 80 percent of residential properties and 65 percent of commercial properties, and they are provided in the shortest period about three weeks to twenty weeks with 1-2% per month.
There are many similarities in a bridge loan and hard money loan. Where the bridge loan reduces, the gap between the more extended term loans and the hard money loan refers to the landing source, investment pool, or private company.
This bridging loan is defined as a closed loan and an open loan.
When the borrower shows a clear and creditable repayment plan, then it is named as a closed loan. This loan is a secured loan for both the borrower and creditor.
And if a borrower doesn’t agree to a secured finance source, then it is termed as an open bridging loan. There are more possibilities of risk in this type of loan, and in most cases, the borrower fails to repay, and it counts as a loss project for both the creditor and the borrower.
-For the home movers:
With this loan, you can buy an inhabitable property.
You can find property restoration.
You can buy a property under the value market.
You want to buy a new home whilst selling your current home. But you are not getting any customer for your existing home, and your favourite new apartment is going to be sold in auction in a few weeks, then what would you do?
In that case, you can make a bridging loan to solve the difference.
If you take a bridge loan, then buy your favourite new apartment by sale. After that, sell your current home at a good price and then repay the loan afterwards. With that, this loan gives you purchasing flexibility.
– It can be used in the IPO:
You can use this sort of loan in IPO (Initial public offerings) related expenses, and when your company has all the shares sold out, then they may repay the bridging loan. These loans are usually supplied by the investment bank for a forwarded payment for future sales.
– It can be used as an alternative to invoice finance:
When your company is at stake, and you have to make a long term deal, and you could be spending a lot of money for the expenses. You can take a bridging loan in that case.
-Paying a tax bill:
You can pay your tax bills through having a bridging loan if it is necessary.
-Starting a new business:
If you feel that you are having a shortage of your capital, You can take a short bridging loan to make the short term expenses and productive ones.
– Extending a lease:
If you feel that the machine you took at a rental needs to stay for more time, but your finances almost runs out, you can ask for a bridging loan.
-Refinancing other loans:
You can refinance other investments with a bridging mortgage.
Require fast finances for a property seen at an auction, then a bridging loan would be the perfect finance for this.
The Pros and cons of Bridge financing
Everything in this world has a yin side and a yang side. The bridge loan also has some benefits and disadvantages. It is up to you whether it is a blessing or a high risk to you and your company.
Let us have a look at the pros and cons of bridging finance.
- Fast Financing: This financing is fast then the other loans and financing. It takes less time for the application process and ending. The application takes about 14 days to conquer.
- Purchasing flexibility: having a bridge loan facility, you can independently buy your favourite products or home without waiting for the current asset to be sold.
- Used as capital in your business: You can use the amount of money for the IPO expenses, and after-sales, you can repay.
- Interest: This can be both pro and con, the pro being that the market is competitive and bridging loans can be as cheap as 0.33% per month.
- Removes contingencies: This type of loan makes you free, and as a Sellers, you may look more favourably on purchase offers.
- Buying inhabitable property: Bridging loans can be used to obtain an inhabitable property.
- More expensive: A Bridging loan can be more costly for its high-interest rates than the other mortgaging loans because of the fast action and reliable security.
- Failure of repayment can be harsh: If your chosen method of refunds fails, then there is a big possibility to lose your mortgaged asset. Because of high interest, at the end of the refunding time, it can turn into a bad experience.
- Origination Fees: The lenders typically charge about 2% for the origination fees.
- Equity Required: When you are mortgaging your present home for your new home purchase, the lenders often require a certain amount of capital, about 20%.
Due your due diligence and have an exit strategy before utilising a bridge loan facility by the institutions, brokers and banks. Please do not take the loan without balancing the costs and risks properly. It can cost you your home. This type of loan can help you to get a new property, and it can be beneficial for your business too if utilised correctly.