What are Bridge Loans?
Taken from its name, a bridge loan helps you pay for your obligations while you wait for a more secure form of financing. It is a short-term loan, usually lasting only up to one year, and it often requires collateral. Collateral can come in the form of real estate or inventory (for businesses).
A bridge loan is also called a gap financing or a swing loan. It is highly helpful for those who are just waiting to be financed in a few weeks’, months’ or years time. This means that both individuals and businesses can take advantage of this.
Although a bridge loan seems to be a good resolution for depleting finances, you should be wary of jumping into it because of the high interest rates.
Bridge Loans for Businesses
Bridge loans are often used by businesses especially when they are running out of money to cover their fixed costs. For example, a company can apply for a bridge loan to pay for their utilities, rent, and wages, while waiting for an investor to finish its due diligence.
The best advantage a business can get from this is that application is relatively easier and faster than traditional loans. However, companies should always remember that this only lasts for a year and depending on your loan, it can just last a few months. This is why companies should accurately gauge when their funding will arrive so that they will not incur more costs if they cannot pay the bridge loan on time.
Bridge Loans for Real Estate
If there is anything that individuals use bridge loans for, it’s usually for real estate. For example, you are eyeing this property for sale and yet you don’t have enough money to fully pay for it as of the moment. You can turn to bridge loans that will help pay for the rest of the property. Of course, the bank or private lender will still need to get collateral for your loan, often in the form of a property as well.
The benefits of getting a bridge loan for real estate is that you can get your dream home simply by using your current home as collateral. This kind of loan doesn’t have restrictions for this kind of settlement. And if you sold your home, you can easily pay off the bridge loan in staggered payments.
But of course, this still has its few disadvantages. For one thing, a bridge loan can cost more than a home equity loan. This doesn’t even take into account the interest you have to pay. To add to that, it can be stressful for you, the homeowner, to own two homes that aren’t completely yours.
In the end, bridge loans are helpful if you are sure that future financing will be able to cover it.