What is a Bridge loan?
A bridge loan is a temporary, high-interest loan that delivers a quick source of cash for commercial or individual needs. It is called a bridge loan because it serves as a bridge between one period of funding and another, more lasting source of funding.
How a Bridge loan functions with an example:
To visualize, imagine a company has been permitted for a $1 million loan from a bank. However, this money will not be accessible for six months, and they are running petite on cash. The company could sign up for a six-month bridge loan of $50,000 to conceal their expenses till the money from the $1 million loan comes through.
Why it matters:
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Most often, businesses and individuals discover themselves in requirements of hasty funding during an interim period while they work out access to massive quantities of funds. The bridge loan initially “bridges” the gap between when money clears out and when more money will be received.
The cost of bridge loans is usually much more expensive than more conventional financing methods, and they are only meant to be utilized in exceptional situations. If a company must depend on temporary, high-interest financing to endure functions, chances are that the company is not worthwhile in the long run.