subject: Is A Bridge Loan Right For You? [print this page] Bridging finance may be a term youve heard before, but youre not really sure what the details are or if its a good idea. Taking on a bridging loan can be a great idea if youre 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 its 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.
The length of time for repayment on bridging loan 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 arent covered by traditional lenders but may be perfect for alternate sources. Thats 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 its 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 youre in need of fast cash to move on an opportunity quickly, then this may be the solution you need. Whether youre 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.
