A bridge loan (usually bridging loan in the United Kingdom, also known as a "caveat loan," and also known in some applications as a swing loan) is a type of short-term loan,[1] typically taken out for a period of 2 weeks to 3 years pending the arrangement of larger or longer-term financing.[2][3]
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A bridge loan is interim financing for an individual or business until permanent or the next stage of financing can be obtained. Money from the new financing is generally used to "take out" (i.e. to pay back) the bridge loan, as well as other capitalization needs.
Bridge loans are typically more expensive than conventional financing to compensate for the additional risk of the loan. Bridge loans typically have a higher interest rate, points and other costs that are amortized over a shorter period, and various fees and other "sweeteners" (such as equity participation by the lender in some loans). The lender also may require cross-collateralization and a lower loan-to-value ratio. On the other hand they are typically arranged quickly with relatively little documentation.
Bridge loans are often used for commercial real estate purchases to quickly close on a property, retrieve real estate from foreclosure, or take advantage of a short-term opportunity in order to secure long-term financing. Bridge loans on a property are typically paid back when the property is sold, refinanced with a traditional lender, the borrower's creditworthiness improves, the property is improved or completed, or there is a specific improvement or change that allows a permanent or subsequent round of mortgage financing to occur. The timing issue may arise from project phases with different cash needs and risk profiles as much as ability to secure funding.
A bridge loan is similar to and overlaps with a hard money loan. Both are non-standard loans obtained due to short-term, or unusual, circumstances. The difference is that hard money refers to the lending source, usually an individual, investment pool, or private company that is not a bank in the business of making high risk, high interest loans, whereas a bridge loan refers to the duration of the loan.
Bridge loan interest rates are usually 11–15%, with typical terms of up to 12 months 2–4 points may be charged. Loan-to-value (LTV) ratios generally do not exceed 65% for commercial properties, or 80% for residential properties, based on appraised value.
A bridge loan may be closed, meaning it is available for a predetermined timeframe, or open in that there is no fixed payoff date (although there may be a required payoff after a certain time).[4]
A first charge bridging loan is generally available at a higher LTV than a second charge bridging loan due to the lower level of risk involved, many UK lenders will steer clear of second charge lending altogether.
Lower LTV's may also attract lower rates again representing the lower level of underwriting risk although front-end fees, lenders legal fees, and valuation payments may remain fixed.
Bridge loans are used in venture capital and other corporate finance for several purposes:
In December 2010, Kohlberg Kravis Roberts (KKR) and partners marketed a bridge loan for its upcoming acquisition of Del Monte Foods. As is common in such cases, KKR planned for the newly private company to borrow money by issuing corporate bonds. To ensure the money would be available, KKR sought $1.6B in bridge loan guarantees, for which it promised to pay 8.75% interest for 60 days and 11.75% thereafter. At KKR's option, these loans could then be replaced with eight-year corporate bonds (in effect, a put option) paying 11.75%. In return for the loans and guarantees, KKR was offering roughly 2% in fees.