Bridge loans are a fantastic way to move from one investment to another. They are typically used to bridge the gap between one obligation to the next and are popular among business owners and real estate investors.
Companies use bridge loans to cover expenses while waiting for long-term financing options. For instance, they may use a bridge loan to provide working capital so they can pay salaries, rent, and utility while they wait for larger sources of funding. The nature of bridge loans gives them the ability to be approved quickly so that deals can be quickly arranged and finalized.
On the other hand, real estate investors can use bridge loans to finance a property while waiting for their current one to sell. This isn’t common, but it’s a great way for customers with excellent credit ratings to bridge two properties together. However, bridge loans typically only go up to 80% of the combined value of both properties, meaning the borrower does need significant home equity in the original property or lots of savings.
However, there are two different types of bridge loans and it’s important to understand them both in order to pick the best choice for your personal situation.
Open Bridge Loans
Open bridging finance is used by borrowers who aren’t certain of their future financial situation. In these cases, it’s possible to use open bridge loans which don’t have set repayment dates. These offer more flexibility and ensures that you can avoid penalties if you can’t meet the set terms.
Open bridge loans give you plenty of flexibility, but they also come with higher interest rates due to the uncertainty. Lenders apply higher interest rates in order to cover the potential risk. This also makes open bridge loans uncommon compared to closed bridge loans. However, if you’re able to prove that you can pay for this type of loan and have the credentials to make it work, then you can be accepted just as easily.
Closed Bridge Loans
On the other hand, closed bridge loans are used when borrowers have a short-term requirement for funding. For instance, it can be used to secure a deal that will quickly pay off, or to use as working capital before a larger source of funding pays out.
Closed bridge loans typically come with lower interest rates and are more likely to be accepted by lenders than open bridge loans. This is because a closed bridge loan gives more guarantee to the lender, thus increasing their confidence in the loan. However, the financial penalties for breaking the terms of a closed bridge loan can be far more severe.