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August 24, 2014

A Guide to Bridging Finance Part. 1

Bridging finance is a short-term loan that allows the borrower a period of time, before refinancing the loan. That is, it provides a ‘bridge’ for the borrower. The following article will act as a guide to bridging finance as a short-term funding option. 
Bridge (n): something that is intended to reconcile or form a connection between two things.
Bridging Finance: a short-term loan that is advanced quickly to a borrower, and allows the borrower a period to time, before refinancing the loan.
It’s important to note that a bridging loan is an advance to the borrower in a short period of time. Where a mainstream bank may take some months to put together a loan for a borrower, an experienced bridging finance company should be able to advance a loan within a couple of days.
While a bridging loan is advanced to a borrower in a much shorter timeframe than a traditional bank loan, most bridging finance companies will still do as much due diligence on a transaction as a bank. This will include obtaining an independent valuation on the property, and conducting due diligence on the borrower’s circumstances. A bridging loan will also generally be secured by a mortgage/charge, in the same way as a loan from a bank.
Bridging finance is often referred to simply as a ‘short-term loan’; or as a ‘bridge loan’, a ‘swing loan’, or depending on the security and jurisdiction, a ‘caveat loan’. In the United States bridging loans are often referred to as ‘hard money’ loans. Bridging finance can also sometimes be referred to as ‘mezzanine finance’, although a bridging loan is usually not technically a mezzanine or subordinated loan.
As a short-term loan, bridging finance is usually for a period less than 12 months in duration.
There are various reasons why a borrower may require a real estate bridging loan, including:

  • to finance the purchase of a property purchased at auction;
  • to capitalise on an opportunity which requires a quick settlement (for example purchasing off a receiver);
  • to raise short-term capital against equity in a property;
  • to fund the refurbishment of a property.

To learn about the different types of Bridging Loans available read our Guide to Bridging Finance Part. 2.