There can come times in business or even in personal matters when you need some temporary financing until some more permanent arrangements that you have made for funding do come through. It is at this time when you can look at bridge loans, which are short-term loans that can narrow the gap in the financing.
Such a situation can arise when a person is required to close a deal to buy a property, but has not yet obtained a mortgage or loan, or managed to sell off assets that can easily raise the required finance. This form of financing is time sensitive and needs for the necessary funds to be arranged within short periods of time. Lenders take advantage of these situations to ask the borrower to pay much higher rates of interest, but the benefit to the borrower is that even though these interest rates are higher, they are short term and allow them to close a deal on such a property in the first place. It can also be less expensive than taking on partners, who may demand a much higher percentage of any profits that you hope to make from the deal.
Bridge loans will normally be of a couple of months duration, though these loans are even given for periods of up to three years. These loans carry a simple interest that is to be paid at the time of the maturity of the loan, along with the principal amount. These financial arrangements are often funded with proceeds from the property or asset being bought with the loan, which is often pledged as collateral for the loan. Borrowers need to establish their credibility to the lenders, have the equity to pledge, be in a position to raise some part of the required finance, and must have a clearly marked strategy for making the payment. People who have a proven track record as credible investors will find it easy to get bridge loans whenever they need them.
One requirement generally of a bridge loan or any loan is to have some sort of “skin in the game”. This implies it is necessary for the borrower to have some capital of his own to put up for the investment that is being planned. The borrower must also be able to prove to the lender that he has a credible plan for making the payments when they are due. Lenders who fund such bridge loans must know exactly how they will be repaid their loaned amount with the accrued interest. Often borrowers can convince lenders that they have applied for mortgages or loans from financial institutions and that these are in an advanced stage.
Bridge loans are widely used in the real estate industry and where commercial enterprises need to get over shortfalls in their budgets. They work to close a gap in financing and cash shortages. Businesses are often asked to put up their property as equity for the loan, and may be able to raise up to 70 percent of this value.