Bridge Loan (gap financing or swing loan) provides the necessary financial resources or money, to secure a short – term loan, usually under a year, from a financial institution or bank. The financing provides the borrower, within a short amount of time or within a week, necessary money or funds to purchase an estate (buying a home) or complete a business transaction. This happens when funds are not available to make an immediate purchase, but sufficient amount of cash will be received, which to pay the proceeding transaction, usually within a year. Until that time has arrived for permanent financing, the bridge loan, serves it’s purpose. Many bridge loans provide the time between the sale of one property and the purchase of another. Quite often, purchasing a new home proceed the sale of an existing home or property, within a short duration of time, within weeks or months. In the commercial real estate market, the borrower may need a bridge loan, for a short period of time, which to pay immediate expense, until the existing property (retail or office space, apartment or condominium) is sold or permanent financing can be arranged.
Bridge loans are contingent upon certain conditions, interest rate and fees. Some lending institution may provide financing, only up to certain percentage amount or eighty percent of the appraised value of the home, pending the sale. The home must be listed for sale through a licensed real estate agent. A secure bridge loan is backed up, by the collateral or property of the loan and interest rate tends to be lower, compared to an unsecured bridge loan, were upon the opposite exist, and the interest rate is higher. Unsecured bridge loans are geared, more for pending business transaction, which anticipates receiving funds. The interest charge on bridge loan, is usually one or two percent above the prime rate. Closing costs are between 0.5 – 1.5 percent, and based upon the credit risk of the person. Some lending institution, may offer a variable or fixed interest rates. This may be important consideration, when budgeting a new home or financing a business opportunity. Interest paid on a bridge loan is deductible. The lending institution may offer options regarding, monthly, quarterly or one lump sum payment, upon termination of the loan. Some lending institutions only require payment of interest monthly or quarterly. If permanent financing or owner’s home does not sell within a year, then the bridge loan is usually renewable. Beware of any redemption penalty, when paying the balance of the loan, before the agreed upon termination. The lender may charge up to two months of interest or some penalty amount.
When a firm or business seeks a bridge loan, from a financial institution or bank, a solid cash flow, generated from the business, maybe sufficient for the lender to offer the loan.
Also, sufficient business or corporate account receivables maybe acceptable for credit requirements, on part of the lender. A bridge loan maybe secured from a lender, when several small investors will be providing sufficient funds to the borrower, which will pay off the loan within a few months. Regarding this type of bridge loan, the lender may require sending or utilizing letters of intent. Letters of intent are send to those various investors, to obtain written notices, that a pending financial deal with the borrower is forthcoming, and investment amount will be paid. Also, less likely the financial arrangement will be withdrawn, however there is no guarantees. When preparing a letter of intent, should specify a time frame, when the consummation of financial arrangements will be executed or date when money will be transferred or send. Also, these investors may provide additional investments or funds to the borrower, if certain contingencies are fulfilled in the agreement. In this situation, the amount of the bridge loan, should based upon payments that will be received by investors, and not always, by contingent amounts, hopefully received in the future.
In 2005, state of Mississippi disbursed $8 million in bridge loans to businesses, affected by hurricane damages. The loans were contingent upon these businesses receiving insurance settlements or securing long term financial loans from Small Business Administration. Also, receiving hurricane relief, the state of Louisiana disbursed $10 million bridge loans to various businesses.