The Secret to Bridging Financing Problems
Financing and cash flow issues tend to have hard deadlines. What happens when a gap occurs between when current financing ends and new financing begins? For many individuals and businesses, the answer is found in bridge loans.
The world of finance is littered with terminology no normal human can understand. Bridge loans are the exception. A bridge loan is exactly what the name suggests. If it a form of temporary financing that essentially buys you time till further financing kicks in.
It always helps with financing to look for the simplest examples, so here we go. I buy a home and escrow is set to close on September 15th. I sell my home to fund my new purchase, but escrow will not occur till September 22nd.
I have a problem because I have a lag period of seven days between the date I have to pay for my new home and the date I get my money from the old home. A bridge loan can fill this gap and let me complete both deals without worrying about the gap.
If you think the home mortgage process is slow, you should see the commercial world. A 30 day approval period is considered blindingly fast. As a result, bridge loans are used pretty frequently to make ends meet while the financing comes around.
Since we are looking at a shorter term period with plenty of risk, the way lenders make money on bridge loans differs from traditional mortgages. Why? Well, lenders cannot make a lot of money over the term of the loan because it is too short.
To make a profit, lenders take a two pronged approach. First and foremost, they are going to charge big points on the loan. You can expect 3 to 5 points at a minimum. The lender will also crank the interest rate up to double the going rate.
These numbers equate to a very expensive loan. When you need to move quickly, however, these loans are hard to beat. They are processed in a few days and the documentation needed is very slim. When things are hot, this can be a godsend.
At this point, you might think bridge loans are thrown around without little thought. You would be right with one exception. While you might get money quick, you usually will get no more than sixty five percent of loan to value.
While bridge loans are not all that common in the personal finance world, they can make all the difference in the world of commercial finance. If your business runs into a time problem, make sure to take a look at them.
Stephan Gibson :: Sep.01.2008 :: Business :: No Comments »
