Bridge loans are largely used by businesses. A typical usage of bridge loans is seen in the Real Estate sector, when the builder safeguards this loan for the construction of property as he can realize the value of the property only after it is sold. This scenario holds good for any business that sells goods and services and gets payment only at the end. This loan acts as the gap financing. It can be used to buy raw materials and other equipment to begin production. It offers the working capital to start a new project. It can used to pay salary to the staff while you are waiting for pending invoices to be paid.
In the case of individuals, it is mostly sought out by people planning to invest in a new property, while they are waiting for their existing property to be sold. Then the banks roll the mortgages of both the property into one. But, banks may offer only up to 80% of the combined value of the properties as loan amount. This means, the borrower needs to hold significant cash savings on hand to meet his prerequisites.
Joseph Stone Capital says that bridge loans are short-term loans taken to bridge the gap while the borrower is securing a much longer and a permanent financing solution. These loans offer instant cash flow to meet present obligations, while they are waiting to get access to a larger fund. Individuals and businesses can experience an instant need for cash, while they are waiting for a loan approval. They can then apply for a bridge loan, during the waiting period, to meet their requirements. These loans are usually offered for a short-term, of say 6-12 months, and come with very high interest rates, given the high risk involved. They also need substantial security and collateral to back them.
This is vital to businesses, where new business opportunities could be hindered due to lack of funds. This loan helps you to access liquidity to grab any unanticipated business opportunity. For individuals too, this loan offers relief to meet any emergencies they may face while carrying out a property sale or any such huge transaction.
Benefits of Bridge Loan
One of the largest benefits of bridge loans is that the financing they offer is short-term. Most other loans are geared towards long-term expenditures such as mortgage. Those expenses necessitate the borrower to pay the loan off over a long period of time. The longer the loan lasts, the more likely it is the borrower will experience from some kind of financial hardship that will make repaying the loan hard. This, in turn, can compound the borrower’s financial problems as penalty fees rise and the borrower struggles to get more funds to cover the mounting debt. Bridge loans are designed to be repaid in full by the time long-standing form of financing is secured.
Another major benefit of bridge loan financing according to Joseph Stone Capital is the ability to choose repayment options. Borrowers can select to repay the bridge loan before the permanent financing is secure or after. In the former case, the payments are structured in a manner that allows the borrower to repay the loan in full over a certain limited period of time. If the borrower makes all the payments on time, his or her credit rating will enhance significantly, allowing them to qualify for long-term loans they would otherwise be ineligible for. The portion of the permanent funding is used to repay the bridge loan in full.
The author, Dr. David K Simson is a trained radiation oncologist specializing in advanced radiation techniques such as intensity-modulated radiotherapy (IMRT), image-guided radiotherapy (IGRT), volumetric modulated arc therapy (VMAT) / Rapid Arc, stereotactic body radiotherapy (SBRT), stereotactic radiotherapy (SRT), stereotactic radiosurgery (SRS). He is also experienced in interstitial, intracavitary, and intraluminal brachytherapy.