You hear about them all the time: bridge loans. But, what exactly are they? Their name is your first clue into their purpose; they fill the gap between two financial transactions. In other words, they give you money to spend while you wait for another income source to come in. Because you’ve received the loan, you can “pay the toll” and cross the bridge from point A to point B.
Their Most Common Application
Although bridge loans can be used by businesses to secure equity until expected working capital comes in, their most common application is in real estate. Many real estate investors use this type of funding to bridge the gap between the sale of one house and the purchase of another.
As you know, when a house sales it goes in to escrow. An escrow term can last as long as 90 days, meaning you won’t receive cash from the home’s sale until 90 days is up. In the meantime, you’re buying another house, and you need that cash from the previous sale to purchase it. Enter bridge funding.
Securing Your Funds
In this type of financing, the lender will go over the source of income, the house’s sale, and your need, the new home purchase. If he or she feels it’s a good deal, he or she will lend you the money to purchase the new house. This way, you don’t miss a real estate investment that might be sold to someone else who has the immediate cash on hand.
Paying the Loan Back
Bridge loans are a form of short-term financing; you’ll be expected to pay the loan back once you receive the funds from escrow. Yes, most lenders will work with you and allow you to set up a payment schedule, but the payback duration is usually no longer than one year. You’ll want to pay the financing back as soon as possible anyway, because these loans do carry a higher interest rate than traditional funding.
Whether you’re an investor with a love of real estate or a corporate boss who needs equity funding for a short duration, bridge loans are one resource that enables you to receive cash upfront without the need of an extensive loan application process or credit check. The lender looks at the project more than the borrower, so this option works well for all. If you have an immediate financial need, it behooves you to look into whether a bridge loan is the best way to bridge the gap between your financial transactions.