Bridge loan


Bridge loan

A bridge loan (also known in some applications as a swing loan) is a type of short-term loan, typically taken out for a period of 2 weeks to 3 years [cite web| url=http://www.thisismoney.co.uk/help-and-advice/advice-banks/article.html?in_advicepage_id=116&in_article_id=395411&in_page_id=90| title=Bridging Loans| date=January 1 2007| accessdate=2007-03-09| publisher=ThisIsMoney] pending the arrangement of larger or longer-term financing.

Description

A bridge loan is interim financing for an individual or business until permanent or the next stage of financing can be obtained. Money from the new financing is generally used to "take out" (i.e. to pay back) the bridge loan, as well as other capitalization needs.

Bridge loans are typically more expensive than conventional financing to compensate for the additional risk of the loan. Bridge loans typically have a higher interest rate, points and other costs that are amortized over a shorter period, and various fees and other "sweeteners" (such as equity participation by the lender in some loans). The lender also may require cross-collateralization and a lower loan-to-value ratio. On the other hand they are typically arranged quickly with relatively little documentation.

In real estate

Use

Bridge loans are often used for commercial real estate purchases to quickly close on a property, retrieve real estate from foreclosure, or take advantage of a short-term opportunity in order to secure long term financing. Bridge loans on a property are typically paid back when the property is sold, refinanced with a traditional lender, the borrower's creditworthiness improves, the property is improved or completed, or there is a specific improvement or change that allows a permanent or subsequent round of mortgage financing to occur. The timing issue may arise from project phases with different cash needs and risk profiles as much as ability to secure funding.

A bridge loan is similar to and overlaps with a hard money loan. Both are non-standard loans obtained due to short-term, or unusual, circumstances. The difference is that hard money refers to the lending source, usually an individual, investment pool, or private company that is not a bank in the business of making high risk, high interest loans, whereas a bridge loan refers to the duration of the loan.

Characteristics

Bridge loan interest rates are usually 12-15%, with typical terms of up to 3 years. 2-4 points may be charged. Loan-to-value ratios generally do not exceed 65% for commercial properties, or 80% for residential properties, based on appraised value.

A bridge loan may be closed, meaning it is available for a predetermined timeframe, or open in that there is no fixed payoff date (although there may be a required payoff after a certain time).

Availability

Most banks do not offer real estate bridge loans because the speculative nature, risk, lack of full documentation, and other factors, do not fit the bank's lending criteria. A bank that issued bridge loans might have difficulty justifying its lending practice to its investors and government regulators. Bridge loans are therefore more likely to come from individuals, investment pools, and businesses that make a practice of the higher-interest loans.

Examples

*A bridge loan is often obtained by developers to carry a project while permit approval is sought. Because there is no guarantee the project will happen, the loan might be at a high interest rate and from a specialized lending source that will accept the risk. Once the project is fully entitled, it becomes eligible for loans from more conventional sources that are at lower-interest, for a longer term, and in a greater amount. A construction loan would then be obtained to take out the bridge loan and fund completion of the project. [cite web| url=http://www.mortgagemagazine.com.au/detail_article.cfm?articleID=1010| title=Short-term loans| month=November | year=2006| accessdate=2007-03-09| publisher=Mortgage Professionals Australia]
*A consumer is purchasing a new residence and plans to make a down payment with the proceeds from the sale of a currently owned home. The currently owned home will not close until after the close of the new residence. A bridge loan allows the buyer to take equity out of the current home and use it as down payment on the new residence, with the expectation that the current home will close within a short time frame and the bridge loan will be repaid.

*A bridging loan can be used by a business to ensure continued smooth operation during a time when for example one senior partner wishes to leave whilst another wishes to continue the business. The bridging loan could be made based on the value of the company premises allowing funds to be raised via other sources for example a management buy in. [cite web| url=http://www.bridgingloans.co.uk/case-studies/petes-business-needs-a-cash-injection.htm | title=Bridging Loans| month=January | year=2008| accessdate=2008-01-07| publisher=Bridging Loans .co.uk]

*A property may be offered at a discount if the purchaser can complete quickly with the discount off setting the costs of the short term bridging loan used to complete. In auction property purchases where the purchaser has only 14-28 days to complete long term lending such as a buy to let mortgage may not be viable in that time frame where as a bridging loan would be.

In venture finance

Bridge loans are used in venture capital and other corporate finance for several purposes:
*To inject small amounts of cash to carry a company so that it does not run out of cash between successive major private equity financings
*To carry distressed companies while searching for an acquirer or larger investor (in which case the lender often obtains a substantial equity position in connection with the loan)
*As a final debt financing to carry the company through the immediate period before an initial public offering

ee also

*Hard money lenders
*Commercial lenders
*Non-conforming loan
*Bridge financing

References


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Look at other dictionaries:

  • bridge loan — see loan Merriam Webster’s Dictionary of Law. Merriam Webster. 1996. bridge loan …   Law dictionary

  • bridge loan — bridge′ loan n. ban a short term loan used for interim or emergency financing, as between selling a house and buying another Also called swing loan …   From formal English to slang

  • bridge loan — n. 1. a short term loan that provides interim financing for the purchase of new property until the old property can be sold 2. a short term loan used to finance a corporate takeover that is often repaid by selling assets of the acquired company …   English World dictionary

  • bridge loan — (izg. brȉdž lȏun) m DEFINICIJA bank. kredit za premošćivanje, ob. kredit banke kojim ona dužniku osigurava novčana sredstva za ostvarenje neke poslovne transakcije, a vraćanje kredita osigurano je od tog posla ETIMOLOGIJA engl …   Hrvatski jezični portal

  • bridge loan — A short term loan to enable the borrower to purchase an asset where the loan is to be repaid from the proceeds of the sale of an asset being replaced by the asset just purchased. In consume loans bridge loans may be used to enable the cons8umer… …   Financial and business terms

  • Bridge Loan — A short term loan that is used until a person or company secures permanent financing or removes an existing obligation. This type of financing allows the user to meet current obligations by providing immediate cash flow. The loans are short term… …   Investment dictionary

  • bridge loan — A loan which is for short duration until more permanent financing is arranged; e.g., person might obtain a bridge loan to purchase real estate and build house before final mortgage financing or the sale of presently held assets can be… …   Black's law dictionary

  • bridge loan — A loan which is for short duration until more permanent financing is arranged; e.g., person might obtain a bridge loan to purchase real estate and build house before final mortgage financing or the sale of presently held assets can be… …   Black's law dictionary

  • bridge loan — noun : a short term loan used to finance an enterprise, investment, or government prior to obtaining other funds * * * 1. See under bridge financing. 2. See swing loan. * * * n. a sum of money lent by a bank to cover an interval between two… …   Useful english dictionary

  • Bridge Loan — Eine Brückenfinanzierung (engl. bridge financing oder bridge loan) ist eine oft von Banken gewährte Bereitstellung von Finanzmitteln zur Finanzierung einer Transaktion (z.B. für den Kauf eines Hauses oder Unternehmens), die vergleichsweise… …   Deutsch Wikipedia


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