Is a Bridge Loan Right for You?

Written By Devi Kristanti on Thursday, August 28, 2014 | 11:40 PM


Bridging finance may be a term you've heard before, but you're not really sure what the details are or if it's a good idea. Taking on a bridging loan can be a great idea if you're in the right situation. This financing option is used as a short-term solution for scenarios where money is needed quickly. Because it is such a risky situation for conventional lenders since the home is still on the market, an alternative option is needed.

Details

One example in residential real estate where it's commonly used is when a homeowner is purchasing a new home while their existing one is still on the market waiting to be sold. Either or both the existing home and new one are used as collateral. Other acceptable forms are accounts receivable, publicly traded stock, real estate machinery and equipment, as well as royalties. These loans can also be used similarly in commercial real estate when an existing property is still on the market when a new one has been identified.

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The length of time for repayment on bridging loans is fairly short and usually around 12 months. Funds can sometimes be arranged as quickly as within 24 hours of approval. And interest rates are higher than those from a traditional lender. Expect that the points will be higher as well. Those applicants with unique situations may not qualify with conventional lending. But with a bridge loan, the following people may qualify, including those with bad credit history, those that are self-employed or even retired. Even those with no proof of income can also be considered.

Typical Situations

There are several situations that aren't covered by traditional lenders but may be perfect for alternate sources. That's where a bridging loan may be perfect for you. Below is just a short list:
• Tax liens and judgment payoffs
• Acquisitions and refinancing
• Purchases
• Partner disputes and restructurings
• Bank workouts
• Foreclosures
• Borrower distress
• Bankruptcies
• Rehabilitation, renovation, and conversions
• Turnarounds
• Refinancing
• Debt Restructure
• Balloon note due

If you or your company falls into any of the above situations, obtaining cash through this route may be an option for you.

Exit Strategy

When applying, most lenders will be looking to understand what your exit strategy is and will be expecting it to be very detailed. So it's important that you take the time to decide what yours is. One example of an exit strategy in a residential home sale is to already have a contract in place for the sale of your home before applying.

Bridging finance is a very costly option and should be only used as last resort. As it has a high interest rate, it can become very expensive. But if you're in need of fast cash to move on an opportunity quickly, then this may be the solution you need. Whether you're trying to buy a new home or commercial property for your business, a bridging loan can be just what you need to make that transaction happen.


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