Bridging loans are short-term loans typically used by companies or individuals to “bridge” the gap between the date of a purchase and the date when financing is completed or funds are available for that purchase. Most commonly, individuals use bridging finance when they have already purchased a new home, but have not yet sold their previous home. In these cases, bridging loans allow the buyer to fund the purchase of the new home immediately; once the previous home has sold, the buyer then pays off the bridging loan with the proceeds of the sale. This can provide buyers with needed cash to close the deal even if their existing home is slow to sell.
For companies, bridging finance represents a method of managing cash flow during the interim period between the acquisition of a capital asset and the acquisition of the funds needed to pay for that asset. Bridging loans are more expensive than traditional loans since they entail greater risk on the part of the lending institution; if the funding is not received by the company for some reason, then the loan may go into default. Most companies will be required to provide the lending institution with evidence that they will be able to repay the loan at a point in the near future. Most companies use this type of finance to cover the cost of necessary equipment when financing cannot be completed as quickly as the equipment is needed; this allows them to continue operations while waiting for financing or funds to come through.
Typically, these bridging loans are issued in either closed or open-end varieties. In Australia, open-end financing is not available. Closed bridging loans have a fixed end date; individuals and companies must come up with the funds to pay off the loan on that date or risk default. While lending companies will sometimes extend the time to pay, this usually entails significant penalties and additional charges for the time of the extension. Closed bridging loans generally feature a lower interest rate since they offer a fixed date of conclusion; this provides a level of security for the lending institution. Open bridging finance, on the other hand, has no fixed due date. This offers additional flexibility to borrowers, but at a cost; open bridging loans tend to have higher interest rates and are more difficult to qualify for, due to the uncertainty of the payment date.