What is a Bridge Loan?
A bridge loan is temporary financing that a company obtains for time-sensitive expenses until it can secure longer term debt from lenders or investors. The money is available in less than seven days while the maturity period usually ranges from a couple of weeks to a year. Bridge loans are also referred to as bridging loans or bridge financing.
Businesses may use a bridge loan while they wait for approval and disbursement of funding for inventory, acquisitions and other business costs. Bridge loans are inherently expensive. Interest rates may be 15 to 24 percent APR and could include up-front fees. The company aims to pay them off fast or refinance them with more permanent debt.
Bridge loans are hard to get from banks due to their high risk. So businesses will usually go to specialist lenders.
There are four kinds of bridge loans:
- Closed bridge loan — Must be repaid within a fixed, pre-agreed time frame.
- Open bridge loan — No fixed payoff date but borrower is usually expected to pay it within a year.
- First charge bridge loan — Bridge loan lender gets first charge on asset used to secure the debt.
- Second charge bridge loan — Bridge loan lender gets second charge after the existing first lender whose debt has already been secured by that asset.
Often, the business is counting on a cash influx in the short term so they can pay it off quickly. If this cash does not come as soon as expected or in as much quantity, the business will be at risk of default. So if the longer term refinancing plans do not have a high likelihood of approval, the business is better off exploring other short term credit options such as personal loans.
Bridge loans are usually secured by real estate, business inventory or other valuable assets. The business and owner has to have exceptional credit and not be burdened by a high debt to income ratio.