What first comes to mind when we speak of “bridging finance”? Most people would immediately think of the literal structure that we see on our usual trips around town. Funny? Not really because it’s not a far cry.
Bridging finance was named after the said adjoining structure. In the finance world, it serves a similar purpose. It connects two planes, two points, two transactions. For people who are new to the said service, this article is for you as we’re laying down the facts about thus funding method.
Technically, a bridge loan falls under the category of interim financing. This means that it is one taken out pending the application and/or availability of a bigger and permanent financing. In other words, it is a temporary loan. It serves to fulfill immediate and short term liquidity needs which without completion will render an entire transaction invalid and impossible. Too structured? Let’s simplify things down and use an example.
Let’s assume that a shoe manufacturing company is expanding its operations. It has been scouting for new locations where it shall set up shop branches. However, a huge chunk of its liquid assets are retained for other purposes so it applies for a bank loan to fund for the acquisition. We all know this type of credit, much like its siblings, are meticulous and take so much time to process. Is that an issue? It can be.
After much research, the company finds the perfect properties. The only catch is that they are perfectly situated that so many other buyers want to snatch it up. The seller can only offer it to whoever is able to provide for the requirements first and best. To solve the dilemma, the shoe manufacturer takes out a bridging finance and uses the fund to pay for the security deposit and eventually the down payment. These should be enough until the bank releases the cash which eventually pays off for the remaining balance and the bridge.
Because of their short term nature, bridging finance is faster to process. They are smaller in amount too. The same holds true for its time period which can be anywhere from a few weeks to at most of three years. In the example above, it provides for short term liquidity needs in an asset acquisition which pertain to pre-purchase expenses such as but are not limited to research costs, professional fees, survey expenses, security deposits and down payments.