Bridge loan is a short term source of funds that is meant to bridge a gap between a short term financial requirement and long term financing. It offers a rapid source of funds and individuals or businesses can proceed to take up opportunities that are time bound without having to wait until they have long-term financing or until an existing asset is sold.

Bridge loans are typically applied in real estate deals, business growth, and cash flow management cases in which time is of the essence.

How Does a Bridge Loan Work?

A bridge loan is a short-term temporary financing in most cases between 6 to 12 months, but could be 24 months. Borrowers get finance within a short period and pay off a loan with the help of a long-term financing or a sale of some assets like a house.

These loans are usually costlier to lend than the normal loans because they are short-lived and are risky to the lenders. The payback form can be an interest free all-inclusive payments or a lump-sum sum to be paid at the expiry of the loan.

Common Uses of a Bridge Loan

Bridge loans are high in the following cases:

Purchasing a new house before selling the old one.

Filling cash flow shortfalls within the business in the short term.

Investing in renovation or fixing up to increase the value of property.

Funding acquisitions, mergers, or growth.

Addressing the short term requirements of working capital.

Benefits of a Bridge Loan

Fast approval and funding

Flexible repayment options

Helps find opportunities of a time-sensitive nature.

Eliminates property or business transaction delays.

Risks and Considerations

Although bridge loans are useful, they have some risks:

Increased interest rates and charges.

Short repayment timelines

Risk when long-term funds are not available or asset sale has not taken place.

An exit strategy should be clearly laid down by the borrowers prior to taking a bridge loan.

Is a Bridge Loan Right for You?

Bridge loan can be a great option when you require temporary financing on short term basis and have a good strategy on how to repay it. Nevertheless, it is most appropriate to borrowers who have good financial bases and future cash inflows that are predictable.

Comparison of Lenders: Lenders are to be compared before application, compare terms and seek advice of a financial advisor to make sure it fits your overall financial plan.

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