| Bridge Loan |
Article Index for Bridge |
Website Links For Bridge |
Information AboutBridge Loan |
| CATEGORIES ABOUT BRIDGE LOAN | |
| credit | |
| corporate finance | |
| real estate | |
|
A bridge loan (also known in some applications as a '''swing loan''') is a type of short-term Loan , typically taken out for a period of 2 weeks to 3 years1 pending the arrangement of larger or longer-term Financing . DESCRIPTION A bridge loan is interim financing for an individual or business until permanent or the next stage of financing can be 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 loans are typically more expensive than conventional financing because of a higher interest rate, points and other costs that are amortized over a shorter period, and various fees and other "sweeteners" (such as equity participation by the lender in some loans). To compensate for the additional risk the lender may require Cross-collateralization and a lower Loan-to-value ratio. On the other hand they are typically arranged quickly with relatively little documentation. IN REAL ESTATE Use Bridge loans are often used for commercial real estate purchases to quickly close on a property, retrieve real estate from foreclosure, or take advantage of a short-term opportunity in order to secure long term financing. Bridge loans on a property are typically paid back when the property is sold, refinanced with a traditional lender, the borrower's creditworthiness improves, the property is improved or completed, or there is a specific improvement or change that allows a permanent or subsequent round of mortgage financing to occur. The timing issue may arise from project phases with different cash needs and risk profiles as much as ability to secure funding. A bridge loan is similar to and overlaps with a Hard Money Loan . Both are non-standard loans obtained due to short-term, or unusual, circumstances. The difference is that hard money refers to the lending source, usually an individual, investment pool, or private company that is not a bank in the business of making high risk, high interest loans, whereas a bridge loan refers to the duration of the loan. Characteristics Bridge loan interest rates are usually 12-15%, with typical terms of up to 3 years. 2-4 points may be charged. Loan-to-value ratios generally do not exceed 65% for commercial properties, or 80% for residential properties, based on appraised value. A bridge loan may be closed, meaning it is available for a predetermined timeframe, or open in that there is no fixed payoff date (although there may be a required payoff after a certain time). Availability Most banks do not offer real estate bridge loans because the speculative nature, risk, lack of full documentation, and other factors, do not fit the bank's lending criteria. A bank that issued bridge loans might have difficulty justifying its lending practice to its investors and government regulators. Bridge loans are therefore more likely to come from individuals, investment pools, and businesses that make a practice of the higher-interest loans. Examples
IN VENTURE FINANCE Bridge loans are used in Venture Capital and other Corporate Finance for several purposes:
SEE ALSO REFERENCES |
|
|