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What is a Bridge Loan?
A bridge loan is a short-term loan used by an individual or a company until they have secured permanent financing or removed an existing obligation. It allows the borrower to meet their current financial commitments by providing them with instant cash flow. These loans last for up to a year, and the interest rates are generally high, which is usually backed by some form of collateral like inventory or property. They bridge the gap during times when financing is required but not available. Individuals, including corporations, can use a bridge loan, and lenders can personalize these loans to suit specific situations.
Additionally, bridge loans also help property owners purchase a new house while they wait for their current property to get sold. The borrowers use the equity from the sale as a down payment to purchase their new home. To find out more details on bridge loans, please do not hesitate to reach out to our team at Harpreet Puri Mortgage.
How long is a bridge loan taken out for?
As mentioned above, bridge loans are short-term loans taken out to meet short-term financial needs. They can be used to secure working capital for a corporation till the funding goes through. These loans are taken out for two to three weeks, and the lender will require collateral as security. Based on the borrower’s repayment capacity, the loan amount and the interest rate charged will be set. The individual can get quick access to funds to meet their short-term liquidity requirements. A bridge loan is referred to as a Swing Loan’ or “Gap Financing.” The loan can extend for up to 12 months.
How It Works
How is a bridge loan different from a traditional loan?
Length of the loan
Traditional loans are longer-term loans, usually between ten to twenty-plus years in length. The interest rate is either fixed or variable based on the scenario. Bridge loans are short-term loans usually for less than three years. These loans are taken out to help companies fund their working capital or add liquidity to a project. They are paid very quickly when compared to a traditional loan. Please note – both these types of loans do not generally have early payment penalties.
Interest rates of the loan
Bridge loans have a higher rate of interest when compared to traditional loans. The reason being is because of the short-term nature of the loan. The shorter the term, the lesser the money the lender will be able to make on the loan. While it may not bother the borrower how much money a lender makes, you need to understand that if the lender fails to make any money from the loan, why would they bother loaning out the money to you? For all lenders, it's the saying "What's in it for me?" scenario. Since traditional loans have longer terms, the lender does not worry much about their margin, as they can make it up over the loan period. Ideally, you will not see any prepayment penalties, which allows the business owner to potentially prevent the lender from making a considerable profit on the loan. However, it does not happen often, so this will not bother the lenders much.
Alternative lenders
While traditional lenders like banks and credit unions can provide bridge loans, it is ideal for getting a private lender for a bridge loan, as they offer a range of flexible options. Private lenders have a wealth of expertise in lending funds for niche industries such as hospitality and offer the best programs for the borrower. However, to secure the loan, the lender will require some form of collateral from the borrower. One of the risks of a bridge loan is misjudged timing, as many borrowers underestimate how long they will need to carry the loan. Additionally, it can cause a financial strain leading to the borrower defaulting in payments to the lender. Depending on what the borrower chooses to do, bridge loans and traditional loans have their purpose. It helps in knowing the details of each type of loan t make a more well-informed decision.
Harpreet Puri Mortgage can help borrowers find suitable lenders to finance their loan requests. Contact to schedule an initial consultation.
How does bridge financing work?
There are several ways an individual or a corporation can secure bridge financing. It all depends on the borrower’s credit history and profile. If a company has a good credit history and solid market position, it will be provided with plenty of options for a short-term loan. However, if the company is suffering financially and requires a short-term loan, it is difficult for them to secure a short-term loan. Businesses must think twice before considering bridge financing as the interest rates are high, leading to even more financial burdens in the long run. The process of securing bridge financing is not as simple; it includes a lot of conditions that help protect the lender. For further enquiries on bridge financing, contact us today.
Advantages of bridge loans:
A bridge loan can be arranged quickly when compared to other loan options. This type of loan can be available to the borrower within 24 – 48 hours. Considering it takes almost a month or two to get a mortgage or a business loan to get approved, a bridge loan is a great option if you need a loan immediately.
A business loan or a traditional loan might require you to provide a lot of information like your business financials, credit history, proof of income etc.; a bridge loan requires an asset-backed as collateral when lending the money, which means there are no extensive checks.
Even though a bridge loan has a high rate of interest, the fact that you can pay back the loan within a few weeks or months ensures the interest rate is controlled, thus making the loan more affordable. As the borrower, you do not need to stress the monthly rates or rising interest costs because the lender will provide you with a detailed interest structure telling you how to pay your interest.
For more details on bridge loans or to apply for one, give Harpreet Puri Mortgage a call today at 416 543 9000
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