Every investor wants to make the most out of their purchases and we don’t see why not. It takes a lot of time, resources and hard work to find the perfect asset for a sweet deal. But we all know how acquiring real estate can be such a taxing job. Luckily, there’s commercial bridging finance that comes to every entrepreneur’s aid.
But what is it and what makes it the perfect weapon of choice? Simply put, commercial bridging finance is a tool that helps investors to acquire their chosen assets faster and more effectively. It provides a short term or temporary loan that fulfills or satisfies short term liquidity needs aka the pre-purchase costs necessary to the transaction pending the availability and/or application of a permanent and often bigger financing (e.g. bank loan, mortgage, and sale proceeds).
Because time is of utmost importance when it comes to real estate and commercial ones for that matter, buyers have to act fast or risk losing the opportunity to another interested party. Remember that the better the asset is, the more heightened the competition becomes. We all want a good deal and anyone will make the move the soonest they can.
The security deposit, the amount paid to the seller as a security that prevents them from selling the asset to someone else for a period of time, is crucial and so is the down payment without which there will be no sale. Let’s not forget about the other pre-purchase expenditures such as the survey costs, research expenses and professional fees to name a few.
These upfront costs are so immediate in nature that many buyers often miss out on an opportunity because they fail to have the money when they need it. But because commercial bridging finance is designed to work for these situations, it is way faster to arrange and does not come with as much fuss in terms of documentary requirements.
Moreover, commercial bridging finance is temporary or short term in nature so it does not pose burdens or risks for a prolonged period of time like its long term counterparts. Plus, providers offer a flexible repayment scheme where users can opt to pay prior to maturity thereby reducing the interests or at maturity which is the date by which one’s main financing has been released and which shall be used in part to close the bridge previously taken out.
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.
In the event that an immediate need comes rearing its head, we’re lucky to have something called bridging finance. But what is it and what benefits does it bring? If you’re new to it, we urge you to read on. This financing medium beloved by the real estate world might just be the lifesaver you’ve been looking for.
A term given to a stop gap measure known for bridging the fund gap brought about by timing obstacles, bridging finance is a short term loan taken out to provide for the immediate short term liquidity needs for asset acquisition transactions. Its popularity and widespread use is due to its number of benefits and below are some of them.
Since time is of the essence in the world of real estate, one has to be fast otherwise someone else might grab the chance before you even get close to it. Since sellers will always require down payment and/or security deposits to be made, this can be challenging for those that have their funds pending. With this financing method, we can eliminate the opportunity losses.
Unlike other types of credit, the use of a bridge provides quite the flexibility. This is because borrowers have two repayment options to choose from and they can favor whichever one suits their needs and capabilities best. As the first option, one may choose to close the loan prior to its maturity or as early as one deems fit and is capable of doing so. The second is where one may opt to repay upon maturity which is oftentimes the day when one’s permanent financing is made available.
Designed to fulfill short term liquidity needs, bridging loans are temporary which makes them less burdensome as compared to other credit options in the market.
Some people choose to finance their acquisitions through credit such as in the form of a mortgage or a bank loan. Others on the other hand opt to sell the current asset they’re using and use those funds to buy a new one that suits their current needs. When that happens, they’ll have to evacuate the current space while waiting for a buyer thus the need to temporarily rent. This creates added cost. By using a bridging finance, buying the new place becomes possible even if the current one is still waiting for a buyer thereby cutting the need to spend on rent.