A bridge finance facility is a type of short term loan. It may be used by individuals, businesses or for mortgage reasons.
Essentially, it is a loan that is advanced in order to cover the period between the termination of one loan and the start of another. It is commonly used to complete a purchase (such as a new house) before the borrower receives payment.
A bridge finance facility in business:
In this case, it is designed to obtain necessary cash for maintenance of operations. It may also be used for financing mergers and acquisitions involving high stakes for borrowers and lenders.
For large corporations it may be the final component to a winning acquisition bid.
Using a bridge finance facility for personal use:
More micro lending institutions in South Africa are offering bridging loans for individuals who are waiting for finance from a pension or provident fund pay-out. This loan may be helpful for meeting short-term needs such as paying for rent, for buying groceries as well as other day-to-day costs.
How does a bridge finance facility work for mortgages?
This type of loan can help you buy a new home while you are waiting for your old home to sell. On the upside, you are able to move into your new home and you won’t have to wait too long. The downside is that you will have to incur the risk of the possibility that your home may not sell within the allotted life of the bridge loan.
What are the advantages?
- It is a short-term finance facility, so the loan is usually for 6 to 12 months.
- It provides immediate cash flow
What are the disadvantages?
- Interest rates vary and are usually dependent on the individual credit rating of the borrower. They do tend to be higher than other forms of financing. Rates typically increase over the term of the loan.
- It can be tricky if you don’t fully understand the timing, structure, terms and range of outcomes that come with this type of loan.