Bridge Loan: Definition, Working Process, Interest Rate etc.

What is Bridge Loan?

The bridge loan is a short-term loan which is used by the company or a person before getting permanent finance. This is temporary finance that is settled out after getting permanents finance. This loan allows the user to meet current obligations by providing immediate cash flow. The duration of the bridge loan is up to one year with relatively high-interest. The bridge loan is backed by some form of collateral such as fixed assets or inventory.

This loan is also known as Interim financing, gap financing, or swing loans. The bridge loan can be used by corporations and individuals, and lenders can customize these loans for many different situations.

How does Bridge Loan Works?

Corporations and individuals turn to bridge loans when they are waiting for the long-term loan but time is consuming for getting these loans. At this stage, the business needs money to cover interim expenses or continue running project. This loan can be used for working capital to cover its payroll, rent, utilities, inventory costs, and other expenses until the secured permanent finance.

Interest Rate for Bridge Loan

As this is temporary finance, the interest rate is higher than any other regular loan. The loan along with interest will be settled from permanent finance.

Difference between Bridge Loan & Traditional Loan

Bridge Loan:

  • This is temporary finance referred as short-term finance, usually for one year.
  • The Interest rate is high
  • Funding Process is faster than traditional loans
  • Usually, installment is not applied here, full amount along with interest will be paid after getting permanent finance.
  • Corporations, Individuals all are preferred it.

Traditional Loan:

  • Usually for the mid-term or long-term loan, usually 3-10 years or more
  • The interest rate is relatively low than bridge finance
  • The funding process is not so fast as bridge finance
  • Repayment paid in installment
  • The company prefers it more

Benefits and Drawbacks of Bridge Loan

Benefits:

  • Bridge finance may not require monthly payments for a few months
  • Projects to be completed within a timely manner
  • Collateral requirements are more flexible

Drawbacks:

  • The interest rate is high that may increase project cost
  • Repayments may be difficult if permanent finance not secured within an expected time