A bridging loan is temporary financing for an individual or business until permanent financing can be obtained. Money from the new financing or permanent loan is generally used to “take out” (i.e. to pay back) the bridge loan, as well as other capitalization needs.
Bridging loans are normally more expensive than conventional financing/loans to make up for the additional risk of the loan. Bridge loans have a higher interest rate, points and other costs that are amortized over a shorter period.
Bridging Loans are very common in real estate transactions were certain costs or deposits are payable before a mortgage kicks in.
Some examples where a bridging loan might be used.
A consumer is purchasing a new residence and plans to make a down payment with the proceeds from the sale of a currently owned home. The currently owned home will not close until after the close of the new residence. A bridge loan allows the buyer to take equity out of the current home and use it as down payment on the new residence. The home owner borrows the money with the expectation that the current home will close within a short time frame and the bridge loan will be repaid.
A bridging loan can be used by a business to ensure continued smooth operation during a time when for example one senior partner wishes to leave whilst another wishes to continue the business. The bridging loan could be made based on the value of the company premises allowing funds to be raised via other sources for example a management buy in.
Although more expensive than conventional loans there is a market for these kind of high risk loans. A lot of financial transactions or business dealings are depending on these short term bridging loan facilities.