Bridging Finance Basics

By: Darren Yates

Bridging finance is a short-term loan that is used as a way to
provide funding for the purchase of a new property while the
borrower awaits the sale of an existing property. Unless all the
stars are in perfect alignment, it’s tricky to coordinate the
sale of one property and the purchase of another property so
that the transactions occur simultaneously.

Bridging finance or a “bridge loan” as it is more commonly
referred to, makes such transactions possible. They keep the
borrower from ending up in a dire financial situation as can
happen when forced to pay two mortgages at the same time. Bridge
loans can be used either for business or for personal reasons.

Primarily short term in nature, the process for obtaining a
bridge loan is similar to that of most types of loans. Most
importantly, it’s advisable to work with a lender that has
experience with this type of loan. Also, since the need for a
bridge loan often arises with little advance notice, being
pre-approved for such a loan is a good idea.

Bridge loans typically are structured as interest only loans
meaning that the borrower pays only the interest on the loan
each month. The borrower continues with this repayment plan
until the property the loan is being used for is sold. When the
sale finally does occur, the proceeds of that sale are used to
repay the principal. The principal payment typically is in the
form of a one-time, lump-sum payment.

The lender does not need to worry too much about default because
the borrower is required to put up collateral to secure the
loan. This can be in the form of another piece of property,
business machinery or inventory on hand. But rest assured the
lender will still thoroughly review the credit history of the
applicant, the business and any partners or others with an
ownership interest to assess the level of risk it is
undertaking.

The interest rate assigned to the bridge loan is based on
several factors: the anticipated risk associated with the bridge
loan, the prevailing interest rates and a premium added by the
lender. Since bridge loans are short-term, generally not longer
than two years, the lender has only a short time to make money
on the deal. The profit is derived from the interest rate.

Expect to pay a higher rate of interest for a bridge loan. And
remember, the monthly payments on a bridge loan generally will
be for interest only. Expect to pay off the bridge loan in full,
usually as a one time balloon payment, as soon as the property
is sold.

In the event that the property is not sold before the bridge
loan matures, it can usually be converted to a conventional loan
without paying a penalty. But it’s always a good idea to double
check this before assuming.

Darren Yates:
Specialists in
Commercial Bridging Finance Commercial Lifeline.
Independent UK based Commercial Bridging Finance brokers.

Feel free to reprint and distribute this article as you like.
All that we ask is that you do not make any changes, that this
resource text is include, and that the link above is intact.