BRIDGE FINANCE – AN EFFECTIVE TOOL FOR SHORT-TERM CASH REQUIREMENTS
What is bridge finance or a bridge loan?
A bridge finance or bridge loan is a type of gap financing arrangement wherein the borrower can get access to short-term loans for meeting short-term liquidity requirements. Bridge loans help in bridging the gap between short-term cash requirements and long-term loans. It is an interim financing option used by companies and other entities to solidify their short-term position until a long-term financing option can be arranged. Bridge financing normally comes from an investment bank or venture capital firm in the form of a loan or equity investment.
A bridge Loan sometimes comes as short-term finance to bridge the gap between two financing periods. It is interim financing for an individual or business until permanent financing or the next stage of financing is obtained. Money from the new financing is generally used to “take out” (i.e. to pay back) the bridge loan, as well as other capitalization needs.
Bridge Financing is a method of financing used to maintain liquidity while waiting for an anticipated and reasonably expected inflow of cash. These loans are normally extended for a period of 1 year to 3 years.
What are the features of Bridge Finance or bridge loan?
- Typically secured by the collateral of property to be purchased or mortgages of other immovable properties.
- Bridge loans fund faster than bank loans. If an opportunity is good, it won’t last long. Bridge loans have fewer requirements than bank loans and thus close quicker. Bridge financing allows investors can grab a fleeting opportunity before another investor snatches it up.
- Bridge finance ensures that you do not miss out on a deal simply because there was no cash at that point in time. Moreover, it provides an easy and fast approach to processing and makes bridging finance a popular choice.
- It is useful for companies before their Initial Public Offer (IPO) to meet the expenses associated with the IPO. The company acquiring bridge financing can give a certain number of stocks at a discount of the issue price to the underwriters that equally offset the loan.
- Bridge financing can also be provided by underwriting an offer of debt instruments like bonds, debentures etc.
- Flexibility: Funds received from open bridge financing may be utilized for any purpose. Bridge financing lets you spend now and repay later when funds are available.
What are the types of bridge financing?
There are two types of bridge financing.
Closed bridging finance is where there is a date for the exit of the bridging finance and is sure that the bridging finance can be repaid on that date. This is less risky for the lender and thus the interest rate charged is lower.
Open bridging finance is a higher risk for the lender. This is where the borrower does not have an exact date for the bridging finance exit and may be looking for a buyer of the property or land.
Why use a bridge loan?
There are two primary reasons to seek a bridge loan: time and eligibility. Closing a conventional commercial real estate loan can take several months, time that many investors can’t afford to lose — particularly when buying in a hot market. As a bridge loan can be obtained in just a few days, investors can close on a property that someone else would have acquired.
Sometimes investors are not eligible for financing due to their credit scores or the condition of the property, which can disqualify them from a conventional commercial loan. Bridge loans are particularly useful in this context as they are easy to obtain and there are no restrictions on how they can be used. For example, bridge loans can be utilized to acquire non-owner occupied real estate, renovate a property in disrepair or purchase commercial property with an occupancy rate that does not meet long-term commercial financing requirements.
What are the differences between Bridge Loans and Hard Money? (Bridge Loan vs Hard Money)
Bridge loans are not necessarily hard money loans but you may hear the terms used interchangeably due to some similarities. Both are short-term financing solutions secured by property and are relatively quick to obtain. They allow for flexible repayment such as interest-only payments until maturation and no prepayment penalties, but often carry higher interest rates than conventional loans.
Bridge loans are specifically used to acquire property, while hard money loans can be used for any kind of purchase. The key difference between the two is the lenders. Commercial banks can issue bridge loans, while hard money lenders are always private investors.
Follow us: LinkedIn
Resources on private equity:
- Cash flow from operating activities
- Free cash flow to the firm (FCFF)
- What is free cash flow
- Weighted Average Cost of Capital (WACC)
- All about cash flow statements
- Top 10 listed companies in India
- What is account aggregator system?
- Capital Asset Pricing Model
About the author