Everyone faces a shortage of money in their life. It does not matter if someone is in business or any other profession, the need for urgent money can arrive anytime. In business, especially, the need for money can come anytime and the urgency to collect or call some fixed amount makes the businessmen choose for Bridge loans.
Bridge loans are short-term loans given for urgent needs to a businessman or any other person who is in need of money. It is given for a period like from three weeks to three years but this period differs from place to place. Bridge loans are also known by the name of swing loans or gap financing. The name itself tells that it is given to 'fill the gap of money requirement. It is generally backed up by the collateral and the rate of interest charged on the loan amount will be higher in comparison to the general loan rate.
Why there is the difference in the interest rate?
The Bridge loan is given at short call and the risk taken by the lender would be higher in comparison to the traditional loan. This type of loan requires some kind of collateral backup so that in case of failure in payment, the lender can sell the mortgage and raise the money. The interest rate would be obviously higher as the risk is also higher.
How to understand it clearly?
Every business requires working capital to finance it's important and must have expenditures like electricity bill, transport charges, payroll and daily expenses. This whole expense can't be delayed or stopped as these are necessary expenditures and without them, the whole business process will come to halt. Therefore, if the management has invested its significant amount on some other important work or the money has been diverted to some non-delaying activity then that working capital can be raised through this Bridge loan. This short-term loan can easily finance all these daily expenditures for an interim period unless some permanent financing is not found out.
In the real estate business, the Bridge loan is given to the person who has a good debt-to-profit ratio. The capacity of the businessmen is taken into consideration strictly. Generally, the Bridge loan is given between the sales of two properties for the interim gap. The amount finances the urgent need and when the payment of first property is done, the requirement of this kind of loan ends.
The Bridge loan is a very important part of financing in the world of business. It solves the problem of urgent need of money and lets the business run without any hiccups. The business faces every now and then shortage of money and it is the solution for that. Before approaching for this kind of loan, one must assure to keep the balance sheet of the company very strong, so that the lender faces no problem in issuing the amount as per standards.