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Bridge Loan
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Bridge Loan can be considered as an easy and fast way to receive fast cash. Bridge Loan refers to a short-term loan taken by a company or an individual normally from commercial or traditional banks, Funding companies and Credit companies, pending disbursement of loans sanctioned by all such financial institutions. These are mostly backed by some form of collateral such as real estate, inventory, accounts receivable, as well as fixed assets.
In case of a company, funds are usually supplied by the financial institution underwriting the new issue. On account of payment part, the borrower company will give a number of shares at a discount of the issue price to the underwriters for offsetting the loan amount. The loan amount under Bridge Loan generally do not exceed 65% of the properties value.
As the term suggests, these loans helps to bridge the gap between times when financing is needed. The term Bridge Loan indicates that it will bridge the borrower to the next transaction. In case of an individual, bridge loans are common in real estate market. Prospective home-purchasers who are ready to buy, but who have not yet sold their current home often use Bridge Loan. It can help to arrange cash for making down-payment on a new house and / or to pay off the mortgage on current home.
There are Two types of Bridge loans. In the first type, money is used to pay off existing mortgage and make down payment on new home. In this case, usually no monthly payments are made on Bridge Loan. Instead, monthly mortgage payments are made on new home and as soon as old home sells, outstanding interest and outstanding balance on the Bridge loan is paid back.
In the Second type, money is borrowed against the equity in current home and this amount is used for
down-payment on new home.
A bridge loan is similar to a mortgage. Under mortgage, an amount borrowed is secured on home. The rate of interest is much lower in mortgage as compared to rates on Bridge Loan.
These loans are generally expected to be paid back very quickly as most Bridge Loans have terms as brief as 90-120 days and it may extend Six months to One year for certain purposes. It is a short-term loan used to finance an individual, enterprise, government until a person or company secures permanent financing or removes an existing obligation. A Bridge Loan is also referred to as Swing Loan, Interim Financing or Gap Financing.
It is to be noted here that these loans can be customized for many different situations. For e.g. ABC Ltd. is doing a round of Equity Financing that is expecting to close in Six months. An amount obtained with the help of Bridge Loan could be used to secure working capital until the round of funding goes through. Terms and conditions of taking a bridge loan may be riskier to consumer or businesses as these loans have to be re-paid in a very short time.
Bridge Loans are normally secured by hypothecating movable assets, personal guarantees and demand promissory notes. In case of sanctioning the loan, cash flow and regular Sales history are of extreme importance to the lender.
Generally, the rate of interest and fees on Bridge Loan is higher as compared with that on term loans and this rate could be fixed as well on account of duration of the loan, and therefore the risk of hike in interest rates is limited. In other words, the typical bridge loan is expensive in comparison with traditional bank financing. Interest rates are usually 12-20%. Fees are charged with respect to;
1) Legal charges 2) Underwriting and / or application charges 3) Appraisal charges 4) Environmental cost etc.
Additional fees may include Feasibility Study charges in case of loan for the purpose of construction or development project scheme. Non-refundable high up-front fees may also be charged by some mortgage companies in this connection.
Advantages of Bridge Loan:-
1) Competitive interest rates 2) Loan amount to be sanctioned depends on the confirmed source of repayment. 3) Pre-payment of loan amount at any time is not subject to any penalty as the case may be. 4) Start-up amd existing businesses find themselves in a position to keep their project moving so as to avoid costs of construction escalation. 5) Immediate cash flow to meet current obligations until permanent financing can be achieved. 6) Bridge Loan can also be obtained in the form of; a) A lump-sum amount of personal loan with a fixed interest rate, with an option of lump- sum repayment at maturity; and b) A personal demand loan with interest-only payments.
Disadvantages of Bridge Loan:-
1) Rate of Interest is higher on Bridge finance.
2) Bridge loan is riskier in terms of the borrowers credit history, or in terms of the properties readiness for marketing.
3) Pre-payment penalties may apply if a bridge loan lender is seeks a specific yield and the borrower pays the loan off earlier. 4) No Guarantee of a take-out apportionment means that bridge loan may become permanent.
Related Topics:-
1) Venture Capital Financing 2) Lease Financing 3) Trade Credit 4) Leverage.
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