Difference between Bridging Finance and Bridging Loans
At one point or another, you may be exposed to bridging finance or bridging loans. Although there are many variations of either of these, there are still major differences involved that would change the way in which it would be used. It is important to know of the differences between the two so as to maximise your opportunities in using them.
Uses of Bridging Finance
There are generally two main scenarios where bridging finance is utilized – securing cash flow for large organisations or investing in new homes. Bridging finance has a considerably lower interest rate as well as lower risk than bridging loans as they are typically secured short term loans.
Bridging finance is commonly used by homeowners seeking to invest in a new property. This allows homeowners to use the low interest funds to purchase a new property whilst they are still seeking buyers for their current home. This tactic ensures both parties are able to profit from this transaction. To allow the option of flexible repayment or lower interest, closed and open bridge exists.
This is also commonly used to assist large corporations in completing their projects through easily accessible funding, whilst corporations are in turn able to reimburse through their customers and clients. As there is a steady transaction between the lender, organisation and client, there is generally very little risk. Lenders would also have collateral acting as security, typically a piece of property, rendering little risk to the lender.
Uses of Bridging Loans
Bridging loans, alike bridging finance are short term loans, ranging typically from a few months to even years. They are often used by small companies to resolve cash flow issues. As these are higher risk to lenders, the interest rates are generally much higher than bridging finance. An advantage to using this is that repaying the loan in specific terms can result in closing off the loan earlier than the contracted deadline, with the chance of incurring no exit fee. Due to the fact that most banks do not reach settlements with small clients with bridging finance, bridge loans in turn have raised in popularity, making it the more ideal choice for those seeking private rather than mainstream lenders.
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