What is a Bridge Loan? How Does it Work?
A bridge loan, also known as a caveat loan, is a type of financing that’s acquired by a business or entrepreneur while they wait for approval of a larger loan. It lives up to its namesake by “bridging” the gap between applying for a loan and getting approved. To determine whether or not this funding type may be right for you or your business, continue reading to learn more about what is a bridge loan.
What is a Bridge Loan?
How a Bridge Loans Works
When a business or entrepreneur needs capital ASAP and doesn’t have the time to wait for approval of a larger loan, they may seek a bridge loan. Typically taken out for 2 weeks to 3 years, it’s acquired while the business or individual waits for approval of a larger and/or longer financing.
Why Choose a Bridge Loan
The single most common reason cited for acquiring a bridge loan is speed. With traditional loans, you often have to wait weeks, sometimes months, for approval. For startups and other small businesses, this lengthy wait can prove disastrous to their normal operations. So to keep their business running, some business owners will choose a bridge loan while they wait for a larger loan.
Drawbacks of Bridge Loans
Of course, there are also some drawbacks to bridge loans. Due to the increased risk on behalf of the lender, bridge loans typically cost more than traditional loans. They have higher interest rates, points, and other fees. Furthermore, some lenders of bridge loans may require cross-collateralization and/or a lower loan-to-value ratio.
Some reports suggest that the average bridge loan has an interest rate that’s 2% higher than a typical fixed-rate loan of the same amount. 2% may not sound like much, but it can quickly add up when it involves business loans.
Bridge Loan vs Hard Money Loan
Both bridge loans and hard money loans offer fast capital for businesses and entrepreneurs. However, there’s one primary difference that distinguishes one from the other. Bridge loans are used to bridge the time gap between a larger loan, whereas a hard money loan does not.
To recap, a bridge loan is a type of short-term financing that’s used to bridge the gap for approval of a larger and/or longer-term loan. It has a higher risk than traditional loans, which in turn results in higher fees and interest rates. But if you need business capital now and don’t have the time to wait for a traditional loan, perhaps a bridge loan is the right choice. Now that you know what is a bridge loan, you’ll be more prepared to make your decision.
This article was brought to you by Intrepid Private Capital Group – A Global Financial Services Company. For more information on business funding and other types of private capital, please visit our website.