Bridge Financing

October 17, 2014 Posted by admin

Bridge financing is a method of financing, used to maintain business credit liquidity while waiting for an anticipated incoming cash flow. Bridge financing is commonly used when the cash flow from a sale is expected after payment for the purchase. An example would be when you sell a house and won’t receive cash for the house for 90 days, but you have already purchased a new house that requires payment within the next 30 days. Bridge financing would cover the 60 day gap in between payment.

Bridge loans are usually more expensive than conventional financing to compensate for the high loan risk. They typically carry a higher interest rate, points and additional fees that are amortized over a shorter period. The lender may also require lower loan to value ratios and collateral that would not be used in conventional financing. Although, they are also arranged more quickly and have much less documentation than other types of loans. Bridge loan interest rates are usually 12-15%, terms ranging less than 12 months. The loan to value ratios generally stay less than 65% for commercial property and 80% for residential, based on the appraised values.

Bridge financing is also typically done by banks underwriting an offering of bonds. If the banks are unsuccessful in bonds to qualified buyers, they are normally required to buy the bonds from the issuing company themselves, on terms that would be much less favorable than if they had been able to act as an intermediary and just sold the bonds to other institutional buyers.

Another type of bridge financing is used by companies before do an initial public offering. It is used to obtain the cash needed to maintain current operations until the stock goes public. Many times the company will offer stock at a discounted rate as payment towards the loan. It is essentially a forwarded payment on the anticipation of future sales. There are 2 types of bridging finance. Closed bridging and Open Bridging. Closed bridge financing has an exit date associated with the funds. This ensures that the loan can be repaid on this date and the interest rates are lower than open bridging. Closed bridging is less risky for the lender because it usually has terms of less than 12 months.

Open bridging loans have much higher risk for the lender. There is no exact end date on the funding although there may be set payment dates in order for banks to recoup some of the funds along the way.

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