Bridging loans are generally taken for a short period of time during the exigency of an enterprise. The exigency of an enterprise may happen due to a lot of conditions where a short term loan is needed of a large amount.
That is the major importance of bridging loans. This type of loan lasts mainly from 2 to 3 weeks. It is also known as caveat loan in the United Kingdom and as a swing loan in some other places. This kind of loan has mainly a high rate of interest as the loan is taken for a short period of time.
The workings of a bridge loan
Bridging loans are used for interim needs of an individual or a business until some good change is done to the business as a whole. Money obtained from the bridge loan is generally used to take another bridge loan or to repay the amount of bridge loans. It is also used for the other capitalization needs. It is bit expensive because of the risk factor involved with it as it is given for a short term.
Swing loans are generally associated with higher interest rates, several other charges and something called “sweeteners” associated with it. The sweeteners are the equity participation factors of some lenders. The lender may also ask for the cross-collateralization and a smaller loan-to-value ratio. But this type of loans is arranged rather quickly and with less documentation.
The most important features of a bridge loan
The interest rates of the bridge loans vary from 11% to 15% depending on the terms of up to 12 months and 2 to 4 points of extra is charged if the repayment of the loan is beyond the due date. Loan-to-value (LTV) ratios are not more than 65% for the business enterprises and it is 80% for the non-business enterprises based on the raising value.
A bridge loan can be closed or open depending on the timeframe of the loan repayment. A closed bridge loan is something where a time limit is promised for the repayment of loan and an open bridge loan is something which has no stipulated timeframe. Lower LTVs in bridging loans may have lower interest rates and higher LTVs may have higher interest rates.