In the world of liquidity and financing, there are lots of different ways in which people get a hold of money. While some forms of financing are very risky and thus require a high interest rate, there are other forms that are simply low risk and can be undertaken with confidence. Bridging finance loans work in this way. There are a couple of different categories of bridging finance and each of them is different in terms of their purpose. This method of acquiring liquidity is done by both individuals and by companies, with different terms and considerations for each.
When we talk about bridging finance in terms of individuals, the explanation is fairly simple. It is a short term loan that is lent to a person to cover the amount of time between when they need money and when an expected sum of money is coming in. A reasonable example of this is when a person is selling their home. Even though they might have done all of the leg work and already made the sale of a home, the money available from that sale is typically not in their hands for 90 days or so. When this happens, it can be hard to purchase a new home or to undertake some business venture that might be rewarding. So what do people do?
In this instance, they may decide to obtain bridging finance to help cover the three months. Since it is a reasonable expectation that the sum of money will be coming in, they can get a low interest rate on this loan, and it can give them the ability to purchase a house, for instance, that needs to be paid for within 30 days. This is what is commonly referred to as closed bridge financing. It is called that because the dates are set in stone, and the risk is minimized to an extent.
The flip side of that would be open bridging finance. In this case, a person might have their home on the market, but they haven’t made the sale yet. When they get bridging finance under these conditions, the rate is a little higher because the date that a person will have their own money is unknown.
When we talk about bridging finance in business terms, we are referring to what happens when companies take out a loan prior to their company going out for public consumption. For example, if a company needs cash in hand, but they have a certain period of time before their stocks are going to be sold, then a bank will often help out with a loan in exchange for discounted stock options when the time comes. This is a deal that benefits both sides, and helps keep companies afloat.