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A bridging loan is a short term loan. It?s a stop-gap or loan to tide you over till you can get a longer-term, more favourable arrangement set up.
Bridging loans are commonly used when the cash from the sale of an asset is expected, but won?t be available till after financing is needed for something else. When you sell your house, you might not receive the cash for a few weeks, but may have already completed on your new home and have to pay for this before you get the money from your sale. A bridging loan can cover the gap.
Usually a lot more expensive than conventional loans, bridging loans normally charge a lot more interest and can have other costs associated with getting them set up. However, they can be set up at relatively short notice and can be very useful especially when perhaps there is the need for finance immediately, and alternative funding will take a bit longer to arrange.
When to use a bridging loan
Often a bridging loan is useful when purchasing property if you need to act fast in order not to miss out. For example if you are purchasing land or property from foreclosure or the seller is in a hurry to sell.
In these cases, the bridging loan would be repaid on sale of the property and then refinanced with a conventional lender like a building society. This might be also when the credit-worthiness of the buyer improves, or maybe improvements to the property mean that it can be re-mortgaged to pay off the bridging loan.?
Used primarily when financing property, a bridging loan might be used by developers who want to start work on a project while permission is being processed. This is risky, as there is no guarantee that the project will go ahead so the loan will be a high rate of interest, usually from a specialised lender that is prepared to take a gamble. Usually once the necessary permission has been forthcoming, then the project will become eligible for loans from more conventional and cheaper lenders.
A home owner who is buying a new house and wants to make a down payment based on the proceeds of the home that is being sold can take out a bridging loan. Equity can then be taken from the current home to be used for the purchase of the new place. There is an expectation that the sale will go through within a short time and the bridging loan repaid.
Commercial uses of bridging loans
Commercially, bridging loans can be useful as a stop gap in a business when perhaps a partner decides to leave, while another wants to continue running it. The loan might be then based on the value of the company?s premises until funds can be raised from other sources like a management buy-in.
Sometimes property can go at a discount if the purchaser can complete quickly. Often in auctions, completion needs to be within two to four weeks. This may not be enough time to set up long term lending, so a bridging loan can buy that extra time needed.
Corporate financiers use bridging loans for a number of purposes. Sometimes capital is needed for a company to keep going between successive private equity financings. A company that is in trouble might take out a bridging loan while it looks for an investor or someone to take it over. Sometimes a bridging loan might be needed as a final piece of debt financing to continue business in the period just before a public offering of shares or a takeover.
Expect higher interest charges
Bridging loan interest rates are usually considerably higher than normal building society and bank rates for mortgages. Terms typically go up to 12 months, might be fixed to a predetermined time frame or can be open, with repayment usually required by a certain date.
Similar to a loan, it is short term and non-standard but loans can come from a variety of sources, whereas a bridging loan refers to the duration of the loan and is normally arranged through a bank that is in the business of making high risk decisions and providing high interest loans.
Bridging loans are quick and easy to set up, but are a short term measure. Expensive, they are useful to bridge the gap between getting something more cost effective, but which usually takes longer to arrange.
Though more commonly used for purchasing property and commercial reasons, bridging loans can also be used when you have any temporary problem with your cash-flow, whether it?s to finance unexpected tax payments, upgrade your home or offices, to buy property to rent out or for holiday accommodation abroad. In fact they can come in handy for any of those big expenses like a new car or a holiday of a lifetime when you know you can pay off the loan in the not too distant future.?
Marianne Heredge is a keen financial writer, click here to find out more about Bridging loans.
Image credits: Wikipedia 1 & 2
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