by Andrew Lennard

Created on: April 30, 2010   Last Updated: May 02, 2010

Bridging Loans – Short-Term Financing for Businesses and Others

Many individuals and businesses use bridging loans to provide short-term financing. This financing gives needed cash when purchasing new property without ready cash. The trick is that permanent long-term financing must come before the end of this short-term loan. Some use it to finance a new property while waiting on the finalization of another property's sale. Others use it to secure property purchased at auction. Some utilize it to raise needed business capital. The uses are wide ranging. The borrower secures the loan with existing real estate. If they default on the loan, they forfeit the property.

Borrowers should use an experienced lender when dealing with bridging loans. If you know that you may need such a loan, getting approval before makes the process go faster. Moreover, since most borrowers need these loans quickly, time is of the essence. Once approved, when the borrower needs the funds, they can get them fast. During the life of the loan, the borrower pays only the interest on the loan each month. At the end of the loan, the borrower pays the principal back along with a termination fee. The interest and fees can make the loans more expensive than normal loans. However, missing out on the new property or a business opportunity may cost more than the fees involved.

Borrowers on bridging loans go through the same vetting process as borrowers on other types of loans. The lender verifies their ability to pay the interest payments as well as their ownership of the collateral property. Some who want a loan do not have property to use as collateral. If they have someone with property who is willing, they can use the other person's property as collateral. However, the owner of the property must be party to the loan. This secures the loan by making the property owner responsible for repayment. The borrower needs to use caution with these forms of loans.

Bridging loans come with loan rates that vary according to the borrower’s credit, the lender’s premium, and what the current rates are on the market. That determines the interest payment due each month. Open-ended loans cost more in interest than close-ended loans. This comes with the added risk since there is no closing in place to terminate the loan. On open loans, the lender often requires complete repayment within a year. Most of these loans convert easily to conventional mortgages. These loans are good financial tools if used properly.

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