An Introduction to Bridging Finance
An article introducing financial beginners to Bridging Loans
A method used to access credit, bridging finance (or bridging loans) is a financial means used to preserve liquidity, while individuals or companies await an expected payout. Or, in less elaborate terms, bridging finance is a short-term finance solution that gives borrowers access to short-term loans that are intended to tide them over until their anticipated payout.
What Bridging Finance (or Bridging Loans) can be used for
Bridging finances are used when individuals or companies need access to large sums of cash.
For instance, when a company comes across a short-term financial short coming and are unable to cover immediate expenses, a bridging finance will provide the company with a cash injection to fund the company temporarily until they sort out their economic situation. In this instance bridging finance acts as a life line to the company’s welfare.
Another situation in which bridging finance is used is in investment. If a shares trader stumbles across a share too profitable to pass up, he will need access to a sufficient amount of funds within the next forty-eight hours if he does not want to lose it. If he can secure a bridging finance within this time frame, then he can purchase the share and sell it again; the money gained can be used to repay the bridging loan and he can reap the profits.
Another common use for bridging finance is in the property market. People might need the temporary cash injection to purchase their new home (before they lose the hold on the property as there may be a due date as to when they can pay the home off or there are other potential buyers) until their old home can be sold. After the successful sale of their old home, the money can be used to repay their bridging loan.
How Bridging Finance Works
As can be seen by the above examples, bridging finances are typically lent to clients who cannot wait until their big payouts, clients who need their funding immediately but who are also expecting an inflow of cash.
The interest rates of bridging loans are higher than standard loans as large funds can be obtained quickly. However to counter the high interest rates, bridging finances are organised to be repaid in shorter amounts of time. In other words, the interest is higher but is repaid over a shorter period of time as opposed to lower interest rates but repaid across a longer period of time (which in the end adds up all the same; figure 1).
Bridging finance can be secured against real estate and, in some cases, over vehicles, shares, household possessions, etc. This is necessary as lenders need security on the large sum of money that they are lending out. The minimum amount offered on a bridging loan is ten-thousand dollars and, in most cases, lenders can lend up to 75% of the security’s value.
Bridging finance is a good solution for those who wish to bridge the gap between their financial shortcoming and their payout.
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