What Is Bridge Loan: Meaning, How It Works, Features, Benefits & Types

Businesses in finance and real estate are knowledgeable about bridge loans. Now, what is a bridge loan, and how do you define the term? Simply put, it’s a short-term loan used until and unless a company or individual acquires permanent financing or pays the existing obligation. It lets borrowers meet their obligations by offering cash flow.

This type of loan has a high rate of interest and is commonly backed by a form of collateral like real estate or even the inventory of a particular business. When used in the real estate domain, these loans are better called bridging loans or bridge financing. Let’s learn more on the bridge loan meaning:

The Role of Bridge Loans – How Important Are They?

Also termed swing loan or interim financing, a bridge loan or bridge gap loan is a short-term loan that serves as a temporary option for bridging a financial gap. It is used in real estate transactions and can also be used in different situations where there’s a requirement for instant funds.

Despite the risks of bridge loans, they offer convenience to borrowers by providing immediate funds. So, they bridge the gap between the instant need for cash and the availability of a fund’s permanent source. The loans offer speedy availability of cash that covers current obligations.

At times, businesses or individuals may wait for loan approvals when they are in need of instant funds. In such a crucial circumstance, these businesses apply for the bridge loan to fulfil commitments during their waiting time. As you already know, these loans are available for a shorter timeframe, from 2 weeks to 2 years approximately. For support, they need substantial collateral. To understand this more in-depth, let’s learn how it works.

Top Benefits and Features of Bridge Loans

Bridge loans will function much more similarly to short-term loans. They have some features that distinguish them from short-term loans. Now that you have learned what is a bridge loan, the following are the key features of the bridge financing:

• Flexibility for obtaining a feasible or short-term repayment
• A loan’s availability for a short period of time, which is less than one year
• The backing of the collateral security for a loan
• The interest rate

Now that you have learned the top features, here are the prime features:

• Firstly, the bridge loan can bridge the gap between the short-term and long-term financial goals
• With this type of loan, one can purchase the house or own funds
• Repaying tenure becomes a more straightforward process

The Working Process of the Bridge Loan – How Does It Work?

A bridge loan benefits both individuals and businesses. An individual who wishes to purchase a new house but hasn’t yet sold their current home might use this type of loan. It allows borrowers to use funds in the home as the down payment for the new house. In this way, they can carry forward their purchase while waiting for their previous house to be sold.

Contrarily, imagine a business is in a crucial scenario where it needs money to cover the costs. Naturally, it waits for long-term financing. In such cases, they can consider bridge loans.

However, let’s assume that a company is raising funds via equity financing and is soon to complete it within six months. During their waiting, the business may choose the bridge loan. Through the loan, one can get the working capital that covers the essential costs. So, the bridge loan also serves the purpose of a temporary solution and keeps your business running seamlessly until the anticipated funding is achieved.

Lenders don’t sanction the loan without inspecting the matter. They are quite selective about loan sanctions while offering bridge loans. They always seek borrowers who have a greater CIBIL history and debt-to-income ratio.

However, lenders should offer real estate bridge loans up to 80% of the combined value, considering both properties. So, the borrower must have considerable equity in the original property or cash savings in a decent amount. Borrowers are also required to own a portion of their current house. Alternatively, if they have a considerable amount of money saved, the lender will accept their loan request faster.

Outlining the Top 4 Types of Bridge Loans – What Are They?

So, what are the four types of bridge loans? Delve into the points below to learn further:

• Open Bridge Loans

  First thing first, open bridge loans neither have a specified repayment source nor an exit strategy. Borrowers can repay loan amounts within various frames. This type of loan tends to be riskier than other types mentioned below. The lender also surveys the creditworthiness and financial position of the borrower.

• Closed Bridge Loans

  The next type is the closed bridge loan, which consists of a predetermined repayment source. Like other types, it’s a short-term loan, which is less risky. So, opting for a closed bridge loan reduces the possibility of uncertainties for lenders. A definite repayment date offers certainties, and that’s the most important reason why it’s every borrower’s first preference when availing of bridge loans. Lenders offer reduced interest rates on this loan since it offers more certainty.

• First Charge Bridge Loan

  It’s a temporary financing option where borrowers can rest assured of utmost security. By “first charge,” we mean a loan that has the highest priority. It indicates that the lender of the bridge loan has the right to the property’s worth when the borrower fails to repay a loan. This offers the lender a level of security in comparison to other types.

• Second Charge Bridge Loan

  A second charge bridge loan is a short-term loan that you can get when a borrower has a first charge or existing mortgage on any property.

A Concluding Thought

Bridge loans are your temporary financing solution that bridges the financial gap in property transactions or immediate funds. They offer speed and flexibility by carefully considering the associated risks and costs.

At times, because of insufficient funds, you may fail to make an important purchase. In such crucial circumstances, when you need short-term finance, a bridge loan comes as a saviour solution. Borrowing this type of loan from the lender offers you flexibility. The best part is that you can enjoy lucrative interest rates and flexible repayment tenures.