Bridging Loans And Their Uses
A bridge loan is basically a short term loan — one that is repaid in under a year. A bridge loan helps the borrower to get the cash quickly while waiting for a long-term loan or other financing to come through. The instant money allows the borrower to pay for outstanding financial obligations while still waiting for a deal or contract.
Bridge loans have high interest rates and need to be backed by collateral. What they do, as their name suggests, is to bridge the gap between a time when the borrower has the more permanent loan or financing that he’s seeking and the present with its immediate financial needs. Bridging finance is used in many different financial situations.
Business owners may acquire bridge loans to finance the needed working capital of their business while awaiting equity financing deals which could only be completed after several months.
People commonly use bridge loans when they are selling a home. There can be times when the real estate market in a given area is moving slowly, or there can be a home that is proving a hard sell. The owners of the home who are selling the house and want to move may take out a bridge loan so that they can pay their utility and food bills, as well as other financial obligations, while they await the sale of their home and the proceeds that they get from that. Or they may use the bridging finance as “chain breaking”, meaning they purchase an already-desired new house while they are still awaiting the sale of their current house.
Bridge loans are often used to protect or improve one’s credit record. A borrower may apply for a bridge loan to finance payment of an outstanding debt, thus making a good credit standing and allowing one to apply for other loans that are more permanent and larger in amount. While they are still moving from one job to another, or waiting to be hired, people may find bridge loans indispensable. Likewise, people can also use of these types of loans to cover cost of relocation demanded by a new job.
Often, you can receive a bridge finance in just 24 hours, since the need for extensive background checks and risk consideration are minimized by the high interest rate, short duration, and collateral backing required.