Bridging loan finance is a popular option for people who need to borrow money and obtain financing fast. It can be a temporary solution, or it can become a permanent one. If you wonder what bridging loan finance is and how it works, this brief guide will give you all the information you need. Read on to find out more about it.
Bridging Loan Explained
Bridging loan finance is a loan with short terms that allow people to borrow money for a certain period until they can sell their property or get approved for traditional funding. It can also be used as an interim finance solution when there’s no chance of selling a property shortly. The borrower must only provide a collateral, it can be in the form of real estate or inventory, to apply for a bridging loan.
How Does It Work?
Bridge loans help a borrower overcome a temporary shortage in funds quickly. They’re typically used for short-term needs, and the borrower can typically pay off the loan in one year or less. However, borrowers who need money to fund major expenses such as medical and housing needs can avail bridge loans.
Bridge loans are said to be not very common among companies, but they can help the former acquire new equipment or fund an expansion to generate more revenue during tough economic times.
Those belonging to real estate that house flips can also benefit a lot from bridging loans. Flippers use the loaned money to buy properties and improve them so they can be sold later on at a higher price. This type of loan gives a fast and fuss-free funding option which what most starting property development company needs.
Types Of Bridging Loans
It’s regarded that there are four different types of bridging loans: the first charge bridging loan, the second charge bridging loan, closed bridging loan, and open bridging loan.
Open Bridging Loan
An open bridging loan has a more flexible loan duration thus it has no definite repaying date. It’s deemed more expensive than a closed bridging loan because of the higher risk it poses on the loan provider. However, a plan to repay the loan should be in place before a borrower is granted this type of loan.
Closed Bridging Loan
A closed bridging loan typically has a duration of between six and twelve months with a fixed end date in place. The borrower's future income stream or new job offers pay for the loan’s term. For businesses, guarantors look at their future expected return of investments or ROIs.
The loan’s interest rate will vary depending on how much risk is present in lending to a certain individual over time. It’ll be assessed through different factors such as a person's credit score, employment history, and the like.
First Charge Bridging Loan
A first charge bridging loan is an interim financing arrangement used when property transactions are pending. This loan enables the borrower to access funds before the completion of their purchase or development deal. It goes with the understanding that if the transaction falls through, they must repay any monies advanced and interest on this type of loan.
Second Charge Bridging Loan
A second charge bridging loan is a loan that lets you borrow money to cover the gap between your mortgage or other loan repayments for a short term. It typically needs consent from the first charge bridging loan lender.
This can make the second charge bridging loan more complicated and lengthier as other first charge lenders might not be willing to give consent.
Who Qualifies For A Bridging Loan?
Both businesses and individuals can apply for a bridging loan, but the requirements might differ for each other. The main difference is that a business will require more collateral, such as property or equipment, than an individual due to their higher risk. Businesses should also have some form of expected income to qualify.
On the other hand, individuals can apply using their saving funds, investments, or property as collateral. There are personal requirements for an individual to apply for a bridging loan which are:
- They must have at least half of their income from sources other than welfare and benefits.
- They mustn't owe any money to creditors, such as credit cards.
- Individuals might also need residential security on their property to qualify for a bridging loan.
Bridging Loans Borrowing Limits And Interest Rates
Interest rates from bridging loans are typically higher than other types of loans. They can be as high as ten percent, depending on the lender and type of loan you’ll avail.
Bridging loans’ borrowing limits may also vary from business-to-business which means that some companies may have a lower limit. It’d be better to call your lender and ask what their borrowing limits are to know exactly how much they can provide.
Bridging Loans Vs. Traditional Loans
Bridging loans have become a popular way for people to obtain much-needed money fast. This empowers people to get financing without the same restrictions as traditional loans. Traditional loans usually require a credit check and proof of income, which can take weeks to process. Bridging loans might require either of those things, but they typically focus on the collateral value.
Bridging loans also have a higher interest rate compared to traditional loans. However, if you needed the fund immediately, which a traditional loan can't provide, a bridging loan is a good option.