Bridge loans are interesting constructions but they are also quite confusing. Finding a bridge loan for your business, therefore, is just one piece of the puzzle. An important piece is about understanding what these loans are.
What Is a Bridge Loan?
These are short term loans provided to businesses. They are temporary in nature and are designed to help a business get from point A to point B, just like a bridge. Point B is at the point where they pay the loan back completely, either by taking out a more permanent loan, or through other means. This is why it is referred to as a “bridge”, something that helps you step over an obstacle.
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How Is a Bridge Loan Different from a Regular Short Term Loan?
There are short term loans available through other types of financial constructions. What sets bridge finance apart, however, is that it is designed for a clearly defined, short term purpose. A term loan, whether short term or not, is usually designed for a general commercial reason. What this also means is that there is a big difference in speed. With a bridge loan, you usually have the money available to you within one or two days, rather than the several weeks that a commercial loan usually takes.
What Can You Use a Bridge Loan For?
Most of the time, bridge loans are offered to renovate or purchase commercial properties. As such, they are property development loans. While almost always commercial, it is possible to find residential bridging loans as well. Usually, any type of work can be financed by these loans, such as adding a new bathroom to a property or constructing an entirely new building. There are some other options that these loans can be used for, but they are only offered to those who have an exit strategy in place. Naturally, you also have to be able to demonstrate that you have a solid plan worth investing in.
What Are Exit Strategies?
An exit strategy is your plan for clearing the loan in full, covering both the principal and the interest. This can be finding a new mortgage or loan, or earning sufficient funds to pay it off in cash. In the case of closed bridge loans, you agree to a specific exit date before you receive the money. For instance, you may take out a loan to complete reservations on a property that has a sale agreement in place, and the money will be paid back once the sale completes. Alternatively, there are open bridge loans, in which no end date has been set, whereby the lender agrees to provide you with the funds up to a certain period.
What Is the Interest Like?
Because a bridge loan is a specialized type of loan, and because it is a short term loan, the interest rate is usually higher. You can, with some lenders "roll up" your interest. This means that you don't make any monthly payments, but rather that you pay back the full amount plus interest at a certain point. In these cases, however, the rates tend to be even higher.
Finding a Bridging Loan for Your Business
Now that you understand exactly what a bridge loan is, you need to know where to find one. This must start with having a full understanding of your needs. It is also recommended that you write a business plan in which you highlight what you need, why you need it, how you intend to pay it back, and when you intend to pay it back by. This will help you to convince lenders to consider your application.
There are six types of bridging loans, so you also need to know which type you want. They are:
- Personal property
The loans, meanwhile, are offered by various financial institutions and individuals. Some of them focus only on one of the types of loans, while others focus on all or on several. Certain lenders offer bridge loans directly, while others work only through brokers. It is quite rare for commercial banks to offer bridge loans, however. Hence, it is easiest to find these loans online, using a variety of comparison websites. Do make sure, however, that you find a reputable website, and that you properly investigate the lenders and brokers that you are considering.
There are clear pros and cons for these types of loans, and you need to be aware of both to understand whether it is right for you. While you have no buying restrictions and you can get the money in your account very rapidly, these loans are also quite expensive and their acceptance criteria are usually quite difficult to meet. However, if you are realistic about the process and you understand the pros and cons, then you should also be able to find a loan suitable for you needs.