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Bridge loans are short-term loans taken to bridge the gap while the borrower is securing a much longer and a permanent financing solution. These loans offer immediate cash flow to meet current obligations, while they are waiting to get access to a larger fund.
Businesses and individuals can be faced with an immediate need for cash, while they are waiting for a loan approval. They can then apply for a bridge loan, during the waiting period, to meet their commitments. These loans are typically offered for a short-term, of say 6-12 months, and come with very high interest rates, given the high risk involved. They also require substantial security and collateral to back them.
This is very crucial to businesses, where new business opportunities could be hindered due to lack of funds. This loan helps you to access liquidity to grab any unexpected business opportunity. For individuals too, this loan provides relief to meet any contingencies they may face while carrying out a property sale or any such huge transaction.
About Bridge Loan
Bridge loans are largely used by businesses. A typical usage of bridge loans is seen in the Real Estate sector, when the builder secures this loan for the construction of property since he can realize the value of the property only after it is sold. This scenario holds good for any business that sells goods & services and gets payment only at the end. This loan acts as the gap financing. It can be used to purchase raw materials and other equipment to start production. It provides the working capital to start a new project. It can used to pay salary to the staff while you are waiting for pending invoices to be paid.
In the case of individuals, it is largely sought out by people wanting to invest in a new property, while they are waiting for their existing property to be sold. Then the banks roll the mortgages of both the property into one. However, banks may offer only up to 80% of the combined value of the properties as loan amount. This means, the borrower needs to hold significant cash savings on hand to meet his requirements.
Any resident individual can apply for this loan. They have to be a minimum of 21 years and not older than 70 years of age. They have to be the legal owner of the property or business.
Quantum of Loan
The loan amount is predominantly decided based on the repayment capability of the borrower. A borrower with a healthy credit score can obtain loans as high as 80% of the project value. The maximum loan amount, under prevailing bridge loan schemes, is up to Rs. 2 crores offered by SBI.
Rate of Interest
The prevailing interest rates on bridge loan is between 12% to 18%. The borrower must bear the processing fees for this loan. It typically ranges between 0.35% - 2% of the loan amount. There are no prepayment penalty on this loan.
These are typically short-term loans offered for 12 months. However, based on the customer profile and discretion of the bank, it may be extended up to 2 years. The maximum repayment tenure one can obtain is 5 years.
Some drawback of Bridge Loans
Though bridge loans are a quick solution for fast liquidity, they have their drawbacks too. Firstly, the interest rates are pretty steep for such short-term loans. The second and most important point is, these loans are offered based on the future receivables. If that fails, you will be left with a huge debt. It would be prudent to opt for a personal loan, which is much more flexible than a bridge loan to avoid the high-risk factor.
Being the largest lender in the country, SBI has convenient and hassle-free loan processing system. Some highlights of their bridge loan scheme are
First year – 11.00% p.a
Second year – 12.00% p.a
Their bridge loan is targeted at top rated corporate companies against expected equity flows. The loan is predominantly offered against proceeds of non-convertible debentures, external commercial borrowings, global depository receipts and funds in the nature of Foreign Direct Investments. The loan is issued only upon producing solid proofs of the above mentioned resources or funds. The maximum tenure on the loan is up to 12 months.
IDBI Bank offers short-term loans to existing customers with healthy investment grade rating, a good track record of relationships. These loans can be used to meet short term cash flow mismatches or as bridge finance against financial closures.
HDFC Bank offers short-term bridging loans for self-employed and salaried individuals. This loan can be utilized to purchase a new house while waiting to sell the existing property. These loans are offered with no hidden charges or prepayment penalty. They are processed quickly and provides faster liquidation. The interest rate ranges between 12.30% - 13.20% currently.
The main advantage of a bridge loan is its flexibility. It provides the borrower with short term capital to conduct business without any interruptions. They are able to carry out daily business activities while waiting for a much larger source of funds to materialize. For individuals dealing with real estate property, it allows them to quickly close on properties or complete renovations to acquire new tenants.
However, it comes with a high price tag. Due to the short-term nature of the loan and the precarious nature of the expected funding, they come with high interest rates. In case of failure in securing permanent funding, these loans can turn into bad loans and result in default.
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