Short-term bridging loans are used frequently to maintain liquidity, when an inflow of cash is expected within a brief period of time. A fast short-term loan can be used, for example, by property professionals, in anticipation of a second piece of property being sold quickly. These interim loans are, also, called swing loans. Frequently, a new property is purchased, while a second property is being closed for a sale. These short-term loans can be used for other types of business lending transactions, but the loans are usually for a commercial business or for a new entrepreneur. The following are several ways a bridge loan can be beneficial for a new business entrepreneur:
1. Start-up businesses frequently are the result of many years of other types of business transactions. The new start-up owner may have been in other kinds of businesses before the new start-up was created. There may be the old business, therefore, to sell. If there is a ready buyer for the old business, then a bridge loan would be designated as a closed loan. There is an exit date for completing the sale of the old business and, then, paying out the bridge loan or interim loan could occur. These types of interim loans are said to be less of a risk, since the repayment monies are certain to be available, after the sale of the old business. The interest rate for this type of safer interim loan would be lower than one that has an open arrangement and no certain buyer.
2. If the start-up business has a second business to sell, then a bridge loan could be possible, in order to finance the new business and location. If there is not a ready buyer, however, the interim loan would be riskier, since the chance of finding a good buyer is possible but not scheduled. Relocating a current business may be one application for the entrepreneur, who is looking for funding. Again, whether the old business has a buyer is critical, in order to secure good financing and low interest rates for the bridge loan.
3. Property professionals frequently use bridge loans. There may be one piece of commercial property that needs to be moved, and there may be a ready buyer. The property owners may need a bridge loan in order to purchase a new commercial building, for example. Gaining an interim loan will assist the property owners in buying a second piece of real estate, while the real estate is available for sale. A fast bridge loan could assist in acquiring a building or house, and then the bridge loan could be paid out, when the old property's closing transactions are completed. Buying a new residence, while waiting on the sale of the old residence, is a way of using a bridging finance arrangement. An interim loan can bridge a, for example, sixty-day gap until the proceeds from the sale of the second house are finalized.
4. With an IPO, or initial public offering, there is frequently an interim loan scenario. The investment bank, that underwrites the new issue, will give an interim loan to the new public offering company. The investment bank is given stock for the new company, at a discounted price. These issues of new stock will offset the interim loan, that has been given to the new IPO. The same arrangement occurs for a bond issuance for a company. However, the investment bank needs to sell the bonds for the new company, or purchase these bonds, themselves.
There are several advantages and disadvantages for using an interim loan arrangement. The advantages include a short-term loan for any gap or delay in cash payment. The funds can be used for operational funding. The cash can be gained from the eventual sale of the other asset. The disadvantages include the responsibility of the debt incurred. The other asset may not sell, and this could be a burdensome result. Interest rates may be higher because of the short-term nature of the interim loan.