If you need a large amount of money quickly, and you will be able to pay it back quickly, then bridging finance is a very good option. You don’t need to be able to pay bridging loans off directly from income however, in most circumstances you will instead be getting a long term loan to pay off the bridging finance. That is not always the case, but that is why it is known as a bridging loan, it creates a bridge to other financing options.
To get a bridging loan is a lot easier than getting a bank loan, because banks usually have to make all sorts of checks to make sure that you’ll be able to pay it back, such as proof of income. This takes a lot of time though, whereas a bridging loan can be acquired in a matter of days. However you will need one thing, something that has enough value in it to cover the loan, which will usually be a real estate property.
In other words, this is a secured loan, and the collateral will probably be some property that you own. That’s because of the amount of money that will be involved, usually at least 25,000, and many times it is a lot more than that. If you have the sufficient amount of equity in your property, therefore, you will be able to get this form of loan.
To better understand how and when a bridging loan can be useful we will look at a couple of examples. First of all there is the classic one, whereby you are using it to get a house that you want before the sale of your current home has been completed. Instead of having to wait for the sale, and for a mortgage on your new property to be approved, you can get bridging finance to get it straight away, which is often necessary if you are going to get a property in high demand.
Or let’s have a look at it from a business’ point of view. Perhaps they are doing well and are looking to expand. If they do not act quickly however, perhaps a competitor will buy the property instead. A common example of this is when farmland is involved, and a farmer wants to buy adjacent land to expand into before other farmers in the area can. With a bridging loan they will be able to do that, and then sort out the long term mortgage later.
In other situations, a long term loan will not be necessary at all. For example, perhaps a stock is at a bargain price and you need the money to buy it immediately while it is still at that price. Then, when it rises in price, you can sell it off and pay off the bridging loan, and also have profit left over for yourself. Of course this would be quite a risky avenue to take.
Alternatively you could be in the opposite situation, not looking to take advantage of some positive situation, but rather trying to avoid a negative one. Bridging finance can be used to avoid repossession and to avoid bankruptcy. It does so by paying off your bad debts, and then you simply have to pay off the bridging loan. You can either do this by getting back on your feet and being able to make the payments as normal, eventually being able to go back to a long term lender for financing. Or else you will have the opportunity to use the extra time you have to sell the assets you have at their full price, and pay off the bridging loan like that, with a little money left over for yourself hopefully.
As you can see, therefore, there are many ways that bridging loans can be utilised to your advantage. They do have high interest rates, however, which is why they should only ever be used in the short term, and not as an alternative to a normal bank loan.
Find out additional information about bridging loans from author, Mark Pollok.
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