Sometimes in life, people need a small amount of revenue before they can turn a major profit. A contractor may need to make improvements on a home before selling it or a homeowner may need a loan to cover closing costs before they can sell. In these cases, a bridge loan can be of great assistance.
What is a Bridge Loan
A Bridge Loan is short term financing which is typically used to obtain funds until long term financing can be achieved. This is where the term ‘Bridge’ Loan initiated. It gives a borrower a bridge until more traditional financing can be obtained. Bridge Loans are sometimes called swing loans or bridging loans but they perform the same duty. Many large scale real estate projects and corporate acquisitions would be impossible without Bridge Loans.
Real Estate Applications
In real estate, Bridge Loans can be used to secure financing to obtain a property from foreclosure, quickly close on a deal or take advantage of a limited opportunity to purchase. Real estate Bridge Loans are typically repaid after the property has been sold or refinanced by a traditional loan. The interest rates on Bridge Loans are typically higher because they represent a higher risk of default for the lender. Typically, bridge loans carry a hefty 11-15% interest rate and they’re usually about 60-85% of the appraised value of the property. If a real estate developer is looking to start a project and he just needs enough money to break ground until he can acquire the proper permits, he may take out a Bridge Loan. This is a high risk loan for the lender because the structure may never get built. If the developer does get all the necessary permits, he can then seek more traditional financing and use that money to repay the loan.
A board of directors may be seeking to sell a struggling corporation but they don’t have the funds to stay in business until they find a buyer. A bridge loan can be granted until the business is sold and the proceeds will be used to pay off the loan. A company may use a Bridge Loan to secure funds between traditional equity financing.
The applications for Bridge Loans go on and on and they are most definitely an important part of the way companies, realtors and developers do business. Bridge lending is a fairly common practice all across the world as people and companies seek the financing they need until they can turn a larger profit. A Bridge Loan is kind of like a loan for seed money. Seed money is often times necessary to have before a venture can begin but bridge lending provides a way to go ahead with plans even though the seed money may not be available.