A bridge loan is like a little bridge that helps you get from one side that is not having enough money yet to the other side that is having enough money until you sell something else and repay the money to the person from whom you have taken the money. Hence for example imagine that you are trying to buy a new toy, but you don’t have enough money yet because you’re waiting for someone to buy your old toy. You really don’t want to miss out on getting the new toy, so you ask your parents to lend you the money for the new toy until you sell the old toy. This is a simple example of a bridge loan. In order to get a better understanding about this term one should look at some of the advantages and disadvantages of bridge loans –
Advantages of Bridge Loan
Instant Access to Funds
The first and foremost advantage of a bridge loan is that it helps in getting instant funds to the company and since companies cannot run without money bridge loan acts like a ventilator for a company that is in need of funds besides the approval process and formalities of a bridge loan is faster and easy if one compares it with other methods of financing like traditional loan or mortgage.
Flexibility of Bridge Loan
Another benefit of a bridge loan is that it provides a tremendous amount of flexibility to the borrower in the sense that one can use the money borrowed from a bridge loan for multiple purposes which is not the case with other loans where the borrower has to use the loan for a specific purpose only. Hence long-term mortgage loans cannot be used to fund short-term working capital requirements and vice versa. Besides bridge loans can be structured to meet the specific requirements of the borrower, and the repayment terms can be customized to match the borrower’s financial situation.
Fewer Formalities
Bridge loan has lesser paperwork and formalities as compared to other loans which require plenty of paperwork and formalities. In simple words, if other loans are like a sea that takes a lot of time, as well as effort to cross then a bridge loan, is like a lake that is easy to cross.
Disadvantages of Bridge Loan
Higher Interest Rates of Bridge Loan
The biggest disadvantage of a bridge loan is that a bridge loan carries a higher interest rate when one compares it with other methods of financing. Interest is the cost of borrowing money, and it is usually a percentage of the amount the company has borrowed. Higher interest rates mean that the company will have to pay more money back to the lender in addition to the amount the company has borrowed. This can make the loan more expensive than imagined by the company, so it’s important to consider the interest rate carefully before applying for a bridge loan.
Not Available all the Time
Another problem with bridge loans is that bridge loans are not offered by all lenders or banks, unlike other loans like mortgage loans or bank overdrafts which are offered by all the banks or financial institutions all over the world. Hence lack of easy availability of bridge loans makes them unattractive for most borrowers.
Short Repayment Terms
A bridge loan is typically for a short period of time which usually ranges from 6 months to 1 year. Hence bridge loan is not a long-term solution as one has to repay the loan quickly and non-payment of the loan can result in additional costs and expenses as far as the company is concerned.
As one can see from the above bridge loan has pros as well as cons and that is the reason why any company or individual thinking of taking a bridge loan should carefully read the above points and then only should decide whether to take the bridge loan or go for some other option.