Bridge loan

A bridge loan is a type of short-term loan, typically taken out for a period of 2 weeks to 3 years pending the arrangement of larger or longer-term financing.[1][2] It is usually called a bridging loan in the United Kingdom,[3] also known as a "caveat loan," and also known in some applications as a swing loan. In South African usage, the term bridging finance is more common.

A bridge loan 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 loans are typically more expensive than conventional financing, to compensate for the additional risk. Bridge loans typically have a higher interest rate, points, costs that are amortized over a shorter period, and various other fees and "sweeteners" (such as equity participation by the lender in some loans). The lender also may require cross-collateralization and a lower loan-to-value ratio. On the other hand, they are typically arranged quickly with relatively little documentation.

Real estate

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.[4][5] 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 is a short-term loan that "bridges the gap" between longer-term loans.

Corporate finance

Bridge loans are used in venture capital and other corporate finance for several purposes:

• To inject small amounts of cash to carry a company so that it does not run out of cash between successive major private equity financings[8]
• To carry distressed companies while searching for an acquirer or larger investor (in which case the lender often obtains a substantial equity position in connection with the loan)
• As a final debt financing to carry the company through the immediate period before an initial public offering or an acquisition.

South Africa

In South African law immovable property is transferred via a system of registration in public registries known as Deeds Offices.[9][10] Given the delays resulting from the transfer process, many participants in property transactions require access to funds which will otherwise only become available on the day that the transaction is registered in the relevant Deeds Office.

Bridging finance companies provide finance that creates a bridge between the participant's immediate cash flow requirement and the eventual entitlement to funds on registration in the Deeds Office. Bridging finance is typically not provided by banks.

Various forms of bridging finance are available, depending on the participant in the property transaction that requires finance. Sellers of fixed property can bridge sales proceeds, estate agents bridge estate agents' commission, and mortgagors bridge the proceeds of further or switch bonds. Bridging finance is also available to settle outstanding property taxes or municipal accounts or to pay transfer duties.

United Kingdom

See also

• Hard money lenders
• Commercial lenders
• Non-conforming loan
• Gap financing