Bridge financing is financing to get short-term loans for immediate business setup until they can get long-term secured loans. The bridge loans or finance are mainly requested for business working capital or to solidify any short-term business needs. As a result of this, bridge finance has a high-interest rate. The financing method is mainly to help businesses cope with cash problems and quickly get a cash infusion from long-term financing sources.
As the term goes, bridging finance is to bridge the gap between the time certain money is required and when you can expect to get it. Access to the necessary funding is important when your company is closing down, or you are about to close a deal. This is where bridging finance plays a vital role and makes a difference with its immediate financial help. A company can ask for bridging finance as working capital if it can grow and profit in the coming 12 months.
Types of bridging finance:
1. Bridge finance for the debt – One can request it with high-interest debt for a short time. But these loans tend to increase with time and become a business burden.
2. Bridge finance for IPOs – It can be helpful before asking for an initial public offering. It helps to cover the floating costs of the business in the process of IPOs.
3. Close bridge financing – It indicates that the time for servicing the loan remains fixed with the borrower and lender.
4. Open bridge financing – In this, the loan period isn’t fixed. However, the financing cannot guarantee the timely service of using the loan.
Therefore, businesses can opt for this smart financing option than traditional lenders with slow turnarounds.
The bridge loan can be formed in two ways – it can help pay off any current property liens completely or can be at the top of the existing lien. In the case of the first option, the loan would pay off all existing liens and try to use the excess money as a down payment for a new property deal.
As per the latter option, the loan is a second or third mortgage and can only be used for a down payment of a new home.
In this case, the buyer wo not have to pay monthly for the bridge financing. When the old property is sold, the money you get can be used to pay off the bridging finance.
