What is a bridge loan?
Lets say you buy a house and you can only pay for it if you sell you own first. The closing date for the deal is the 15th and everything has to come together then or the deal off. The 14th comes around and for one reason or another you are short on cash that was supposed to be in hand by now. You need 10 G more on Monday to make the deal and you know you will have the extra needed cash on Friday. To make the deal work, you take out a loan to bridge the gap so you can buy the house on time. That is bridge finacing.
A bridge loan is a form of short-term financing which extends a line of credit to a borrower for a short period of time, typically at a very high rate of interest. As the name suggests, a bridge loan bridges the gap between more permanent methods of financing; these loans are sometimes used in the real estate industry, by venture capitalists, and by some investors. This type of loan is not available at all banks, since it tends to be more risky than long-term lending options. The advantage of a bridge loan is that it provides an immediate flow of capital, which can be extremely useful. For example, a real estate speculator might get a bridge loan in order to buy a piece of property which is being offered at an extremely good price, with the intention of getting a loan with better terms later. Bridge loans are also used to make up various other temporary funding shortfalls. Someone might also use a bridge loan for something like purchasing a used car, with the intent of repaying the loa
• True to its name a bridge loan “bridges” the gap between the current situation and more favorable financing in the future. Bridge loans are used to define several unique types of financing, but the common thread between them is that the the bridge loan is used for a short term, is more expensive due to increased risk, and is made for the purpose of allowing the borrower to “move forward” with financing, construction, or acquisition activities they would not otherwise qualify for. Once the bridge loan allows the borrower’s process to continue, the future financing activities in that process create compensation for the maker of the bridge loan either in terms of paying off the debt, or granting a portion of the transactions profits. Some examples of bridge loans are: • John Doe is selling Home A in order to buy Home B. He might seek a bridge loan in order to secure the financing on Home B without having to wait for Home A to sell. • John Doe comes across a distressed home that will be
A bridge loan is a short term loan not to exceed two years and is utilized temporarily to deal with pressing financial obligations until permanent financing can be secured. Bridge loans are generally accompanied by high interest rates (ranging from between 12% to 18%). A bridge loan is also generally secured by real estate or some other form of collateral such as business inventory and stocks.
