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What is Bridge Financing?

Businesses might use bridge financing to extend an interim loan to maintain financial stability for a limited time.
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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 30 July 2014
  • Copyright Protected:
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Bridge financing involves the extension of an interim loan that allows the borrower to maintain financial stability for a short time, in anticipation of finalizing arrangements for a long-term loan. Sometimes referred to as a swing loan, bridge financing is often used in real estate deals, as well as in some business operations. Here is some information on how bridge financing works, as well as a couple of examples of when bridge financing may be desirable.

Configured to literally function as a financial bridge between available finances today and what is anticipated to accrue in a short time, the concept of bridge financing allows financial transactions to continue without being placed into a holding pattern while waiting for available funding. Because bridge financing is understood to be a short-term solution, the expectation is that long-term credit will be approved within a matter of weeks or months. As with any type of loan situation, the borrower has to demonstrate a reasonable ability to repay the short-term loan, as well as meeting eligibility requirements for obtaining long term financing.

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The most common use of bridge financing occurs within the real estate industry. It is not unusual for persons who are purchasing a new home may find that there is a lag between being approved for the mortgage on the new property before their previous home has sold. Bridge financing steps into the gap, providing the homeowner with finance support in the event that the new property goes through closing before the equity in the old property becomes available for application to the mortgage. This allows the homeowner to move forward with taking possession of the new property. Once the older property is sold and the deal is closed, the proceeds can be used to pay off the short-term loan created with bridge financing and apply the balance to the new mortgage.

Companies may also engage in bridge financing. The application is similar to the example of purchasing a new home. Businesses that are able to demonstrate a reasonable expectation of having resources to engage in long term financing efforts within a short period of time may obtain bridge financing to continue operations until the resources are available to serve as collateral for long-term financing. This process has helped many companies to be able to purchase new equipment and buildings for operations, without any disruption or cutbacks needed in the usual and standard operations already in place.

As a means of allowing persons and businesses to transact business deals even when resources need to be converted in order to secure long-term financing, the concept of bridge financing serves as an ideal way to achieve financial goals, without being derailed by temporary circumstances.

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