Bridging finance – also known as a bridging loan – is a type of short-term financing that usually “bridges the gap” between the purchase of one property and the sale of another.
In most cases, the term is used for residential real estate purchases, but bridging finance is actually a financing option that businesses geared towards refurbishment or physical expansion ought to look into.
Why Do Businesses Take Out Bridging Finance?
In commerce, bridge loans can help tide you over a short period of time if you’re short on cash and need to make quick purchases or require necessary repairs to your office or facility.
Some companies take out bridge loans whenever they’re waiting on funding for the long-term. For example, in the case of startups, founders may avail of bridging finance to cover operational costs while pending the release of funds from an ongoing financing round.
In which case, the amount borrowed will be used to take care of inventory, payroll, and other expenses to keep the business running.
But, for the most part, bridging finance is used to purchase property upon which to build a new office or facility, expand one’s operations, or pay for the cost of refurbishment for either an office or industrial facility.
Take note, however, that bridging finance is a short-term loan. Fees and interest rates may be considerably higher than other financial instruments such as mortgages and personal loans. It should also be stated here that eligibility for a bridge loan will be dependent on your lender.
Some lenders just look at credit scores, while others demand to see a potential borrower’s business plan. Either way, a lender will also ask if you have a clear exit plan to see if you have the capacity to pay the loan off within the stipulated time frame.
To be fair, though, the application process is pretty quick and straightforward. Many lenders allow borrowers to apply for financing online. Approval usually happens within 24 hours of application.
If lenders find that all the requirements are in order and your exit plan is solid and sensible, they will approve your application. You also get your money faster, as you can receive it within two weeks of approval.
What Sort of Bridging Finance Should I Consider?
There are two types of bridge loan: open bridging and closed bridging.
Open bridging finance does not have a fixed repayment date, but it is generally understood that the borrower needs to pay the full amount within twelve months.
In the case of closed bridging, both lender and borrower agree on a fixed repayment date. Closed bridging is usually chosen by borrowers who need to pay for a new property but are waiting on the proceeds from the sale of an existing lot or structure.
It should be noted at this point that it is much easier to get approval for closed bridge loans as opposed to open ones.
Know More About Bridging Finance
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