Bridging loan means an intermediate or subsidiary loan that can be issued to both individuals and legal entities. This form of lending is built for those who, due to certain circumstances, cannot get a bank loan. Therefore, bridge loans are issued at interest rates over the average bank rates.
Since bridging loan is used as a temporary solution (until the moment when conditions improve for issuing a bank loan or other source of financing on more favorable terms), this form of lending is extremely short-term in nature: bridge loans are issued for a period of not over than one year.
But why would anyone agree to a “non-market” rate loan? The fact is that such loans, firstly, are taken to cover urgent needs as soon as possible, and, secondly, in anticipation of a high return on current activities in the near future, or the making of a profitable commercial or financial transaction, which must be financed immediately.
Thus, bridging loans can be issued by companies for the following options:
- covering current monetary obligations for a certain period;
- financing business development and capital expenditures;
- purchase of real estate and other assets at fair offers;
- repayment of overdue obligations;
- providing collateral for capital market transactions or participation in tenders;
- for the buy-back and amortization of the company’s own shares to organize an IPO.
For example, bridging loans for the organization of an initial public offering are often provided by the issuing bank itself.
Bridging loans are very often used as a form of financing for young innovative companies known as “startups”. As a rule, for new companies that do not yet have positive net cash flows, the choice of debt financing instruments is rather limited. They do not have access to medium-term and long-term classic loans or credit lines. Therefore, they can expect to attract either commodity credit, or factoring, or bridge loans. The latter are used in the form of bridge notes issued by venture capitalists or investor syndicates.
There is also a separate type of bridge lending to finance the initial stages of construction of residential and commercial real estate secured by housing under construction. However, the terms of such lending are also quite strict – it is necessary that the construction completion period should be less than a year.