Facts You Need to Know About Bridging Finance

Fact-stampWhat 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.

Breaking Commercial Bridging Finance Myths

Acommercial loanWhen it comes to raising funds by virtue of credit, people have two main options and this is based on the factor of time namely long term and short term financing. One of the more common and widely used form of the latter includes what we call commercial bridging finance.

Providing what people refer to as bridge loans, it is a type of interim financing arrangement that allows borrowers to attain short term funds to fulfill their short term liquidity needs by connecting a need coming due and one’s bigger and permanent source of funds.

But despite of its widespread use, several myths continue to haunt commercial bridging finance so we took it upon ourselves to go bust these misconceptions. After all, how will people realize the benefits it can bring if they are filled with lies that fuel their misunderstanding about the service? To keep our facts straight, here take a look.

“They pile more debts.”

Although a type of loan, it’s not safe to assume that they’re just another liability. They’re unlike any other as they are a type of interim finance. Eventually, they will be closed by one’s main funding source the moment it becomes available. Because they are temporary and short term in nature with a period of often between two weeks to three years, it becomes less burdensome.

“They’re only meant for commercial asset acquisitions.”

Commercial bridging finance is specifically designed and catered for investors and entrepreneurs who wish to buy assets for office and business purposes. However, bridging loans in general can be used for an array of different purposes.

“They are financially hefty.”

A loan, regardless of type and size is a legal and binding obligation. But that doesn’t mean that they are all burdensome. Others may be but there are those that prove useful and beneficial instead of a burden just like bridge loans. They do come with interests but what makes them a delight to use lies in their short term and temporary nature. After computation, they prove to be cheaper since the interest rate is applied to a lesser number of months or periodic intervals.

“Paying them is difficult and meticulous.”

This is the most outrageous and silly of misconceptions about commercial bridging finance. Flexibility comes with these loans in terms of repayment. Borrowers have the option to pay it out before maturity as early as they can and want to or at maturity once permanent funding has been released and made available.

More at Alternativebridging.co.uk.