Kinds of Bridging Loans
Bridging loans are described as a stop gap measure that prevents opportunity losses by providing a temporary loan for short term liquidity needs pending the arrangement and arrival of a permanent and bigger source of finance.
Confused? Allow us to explain how it works by virtue of an example. Let’s say that Rob and Anna are planning to buy a new house for their growing family. They both have savings but it’s not enough so they decide to fund the acquisition either by selling their current house or getting a mortgage. The trouble with either option is that they take time. The former takes time to wait for a buyer. No one’s really sure as to when the asset gets sold. As for the latter, processing it or any similar credit arrangement will be meticulous and time consuming.
Of course, Rob and Anna still push through. Besides, it’s a given fact for both options. Now the problem arises when the house they wish to buy gets a lot of attention from other interested parties. If they don’t provide for the down payment or at least a security deposit, they will lose their chance. To avoid that they’d take a bridging loan.
Because it’s faster to process and cash is released almost immediately unlike other financing options, it serves as the perfect method for short term liquidity needs as mentioned. Moreover, payment comes in two forms which makes it all the more flexible. How? Let’s check the two kinds of bridging loans as follows.
The Open Bridge
You see, bridging loans providers allow borrowers to choose their mode of payment. Users may opt to close it before it matures or as it matures. With an open bridge arrangement, the maturity date is not stipulated but is rather and often dependent on the time by which one’s main fund source (e.g. sales proceeds, mortgage, bank loan) becomes available.
The Closed Bridge
A closed bridge on the other hand stipulates a date which can and may also be the time by which one’s permanent financing becomes available. This is often agreed by both parties at the onset and is stipulated in the terms and conditions of the contract.
As to which of the two types of bridging loans should be preferred ultimately depends on users. At the end of the day, we have varying needs and circumstances so it’s a must to choose an option that complements you best.