Bridging loans are short-term loans acquired to meet a temporary cash flow needs. One of the most common reasons for using bridging finance is to cover the time gap between purchasing a new home and closing the sale of the current home; it is in this situation that most typical consumers first encounter these types of loans. They are often used by businesses to allow the purchase of goods or property when cash flow would otherwise not allow this.
Generally, bridging loans are not issued for longer than a twelve month period, although some three-year contracts have been reported. By their very nature, these loans are only intended to meet an interim need and not a long-term one. Most bridging loans are closed, with a specific date for repayment. Others are open-ended, accruing interest until they are repaid, but generally specifying repayment by the end of a year’s time. Bridging finance usually carries a higher interest rate than other loans, and in all cases collateral is required to secure the loan.
Businesses often need bridging loans to meet short-term financial needs. For instance, a company may have the opportunity to buy materials cheaply, but lack the ready cash to purchase them immediately. Bridging loans can provide the needed cash to make the purchase, and then may be repaid with the proceeds gained by selling these materials at retail. Property developers may also use bridging finance to acquire real estate for building projects. Until the necessary permits and legal paperwork is completed, the developer may not be eligible for traditional loans; in these cases, bridging loans are necessary to cover the gap between the purchase of the property and the time when a lower-interest construction loan is available from a mortgage lender.
Bridging finance requires collateral, usually in the form of real estate. In some cases other forms of collateral are acceptable, such as business equipment, vehicles, or stocks and bonds. The amount of the bridging loan cannot exceed the value of the collateral. Lenders will usually not extend a bridging loan for more than eighty percent of the value of real estate, and for other forms of collateral the percentage will be significantly lower. Since the lender assumes greater risks with bridging finance, the interest rate will be higher than other collateralised loans. Additionally, because of this higher risk, traditional banks generally do not offer bridging loans; borrowers must obtain these loans from other lending institutions.
One great advantage of bridging finance is the rapid availability of funds. In some cases bridge loans can be finalised within seventy-two hours, a sharp contrast to the weeks or months that a traditional mortgage or loan application may require. Since the loan is intended to be repaid very quickly, the higher interest charges do not usually create an undue financial strain on the borrower. For businesses, contractors, and homeowners, bridging loans can provide a much-needed infusion of cash when it is needed most.