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.
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
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.
of Bridge Loan:-
1) Competitive interest rates
2) Loan amount to be sanctioned depends on the confirmed source
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
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.
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.
1) Venture Capital Financing
2) Lease Financing
3) Trade Credit
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