In these cash squeezed times, bridge loans are perfect to enable individuals and businesses and borrow on a short term basis, writes Jo Chapman, Marketing Director at Informed Funding.

 

A bridge loan is a type of short-term borrowing facility, typically used to “bridge a gap” usually between the sale and completion dates in a chain.

Various forms of bridging finance are available and while these loans are not arranged through a bank, and therefore outside of the Financial Conduct Authority (FCA) regulation, there are financial organisations such as Informed Funding who will be happy to help you find the right bridge loan.

Essentially a bridge loan is similar to a hard money loan, both non-standard finance options usually obtained in short-term, often unusual circumstances. Under the bridge loan structure, finance is typically taken out for an interim period of two weeks to three years and as such bridging finance can provide borrowers with easy to access capital and essentially until access to more permanent financing is available.

A key advantage of this type of loan means that it can be arranged quickly with little red tape or documentation required. Although the risk can attract higher rates of interest over shorter time periods and the lender may also state additional terms, in some cases, requiring collateral to secure the finance. The additional risk involved for financers can make it a slightly more expensive option than more conventional financing through a bank.

The nature of bridge loans means they are often used by businesses to make commercial property purchases, bring property deals to a close, recover land from possession or take advantage of a short-term opportunity in order to secure more permanent financing.

 

Bridge loans are typically used in corporate finance and venture capital initiatives to:

• Allow a firm to boost cash flow to operate during major private equity financings
• Carry distressed companies through their search for a larger investor. They will usually receive a considerable equity position in connection with their loan
• Serve as final debt financing ahead of an initial public offering or acquisition. To ensure continued operation of a business, in instances where one partner wants to leave and the other would like to remain in control.
• A bridging loan is usually arranged based on the value of the company premises, allowing room for other funding streams, such as a management buy in.

 

Bridging loans can also be used for auction property purchases, where the buyer has only a few weeks to complete; longer term lending such as a buy-to-let mortgage may not be viable in that time frame; whereas a bridging loan would be perfect.

Bridge loans based on real estate are typically paid back when that property is sold or even refinanced with a traditional creditor. How this happens depends upon project phases with different cash needs and risk profiles that can affect the ability to secure funding.

A bridge loan is often obtained by developers in order to carry out a project while permit approval is sought. Often due to the uncertain nature of projects a high risk is attached and reflected in the interest rates offered.

Often this method of financing is used when a consumer is purchasing a new residence and plans to make a down payment using the proceeds from the sale of a currently owned home. When the sale completes the borrower will pay back the loan.

A bridge loan allows the buyer to utilise the equity of the current home and then use it as down payment on the new residence when they expect the current home to close within a short time frame before repaying.

During a property deal; the house may also be offered at a discount if the purchaser can complete quickly. In this case a lender can offset the costs of the short term bridging loan allowing for easy completion.

Sellers of fixed-property are also able to bridge sales proceeds. Estate agents can bridge estate agents' commission and Mortgagors often bridge their proceeds further or switch bonds.

The terms of a bridge loan differ but essentially it may be closed (for a fixed timeframe), or open (with payment options to be determined).

 

Whatever the need for your bridge loan, Informed Funding specialise in connecting individuals and businesses to the right finance options. Informed Funding enables businesses to access the right type of funding with ease and efficiency. Contact a member of their experienced team for advice through their informative website.