A bridge loan is a type of loan that provides short-term financing for a business or individual while they wait for a more permanent or long-term financing arrangement. A bridge loan covers time spans ranging from 1 week to 3 years.
The objective is to provide capital in the temporary absence of a large, long-term scheme. Once the new financing scheme is in place, the bridge loan can be paid off.
Since bridge loans are considered riskier for lenders, they also carry higher interest rates. Other costs and conditions could also be imposed by the lender, such as cross-collaterization. This means that collateral for one loan could also serve as collateral for another.
Despite these additional requirements, bridge loans can be more convenient for debtors because of the minimal documentation required and relatively speedy processing.
Bridge loans can be very useful in commercial real estate, for people who have to acquire quick funding in order to save a piece of property from foreclosure. Once the property is sold, the bridge loan can also be repaid. The bridge loan shares similar characteristics with the hard money loan, which is a type of asset-based loan financing, and under which the amount issued is dependent on the value of the property.
Bridge loans lay also be referred to as bridging loans or caveat loans. Depending on the situation, a bridge loan may also be called a swing loan.
