Bridge financing. What is bridge financing in mortgage lending
Andrey asks
Good day, Andrey! Yes, it is issued to individuals.
What is a bridge loan, and can it be issued to an individual?
A bridge loan is a loan issued for a short period. The maximum period is 12 months. It is offered to the borrower to cover current obligations at high interest rates. This is a type of mortgage.For example, you like a new house, but you don’t have the money to buy it. You need to sell your old house in order to buy a new one with the money you receive. But you or the seller don't want to wait for it to sell. A bridge loan makes it possible to buy a new mansion before the old one is sold.
An example of a bridge loan is the seven billion (7.16) loan to Greece through the EFSM to save Hellas from "immediate default".
Of course, Greece is not an individual, but such loans are also issued to individual citizens. Use the services of a specialized service, and it will select for you domestic financial organizations that issue such a loan:
And we will tell you about Orange Bank (head office in St. Petersburg), which offers clients a bridge loan. The loan amount ranges from 1-50 million rubles. The loan is issued at 23% (minimum) for a period of 4 to 12 months.
The requirements for the borrower are as follows:
Age – within 23-65 years;
Work experience – at least three months at the last place of employment;
Confirmation of income - request to the employer, certificate in the form of a financial organization, certificate 2-NDFL.
Russian citizenship is not a mandatory condition. For documents, along with a completed application form, it is enough to present your passport.
It should be understood that a bridge loan should be taken out when the purchase of a new property can be paid for with funds from the sale of the old one.
The application is considered within three days after receiving the questionnaire. If it is approved, the borrower can receive money at the bank's cash desk or through payment terminals. The loan is repaid in equal installments (annuity payments).
Additional information (place of conclusion of the agreement, early repayment, time of loan issuance) can be obtained by contacting bank employees.
A bridge loan is a special type of bank loan that falls into the category of intermediate or auxiliary loans.
Such loans are usually issued for a strictly established period, namely, no more than one year, and at a decent “drip” interest rate. Issued by the bank for any urgent needs that must be satisfied as quickly as possible.
Both individuals and legal entities can apply for a loan of this type. This type is especially widespread in the field of venture financing, which is an investment in any business (business) with the aim of receiving a percentage of the total profit in the future.
Investments of this kind mostly involve huge risks. Most often they are directed to organizations developing products in the IT field and other highly profitable industries.
Applying for a bridge loan may be appropriate if the “newly founded” enterprise has not yet managed to pay for itself, but has spent all the funds allocated for business development.
In other words, this is a real opportunity for young and promising companies to receive funds in the shortest possible time to expand their business or improve the operation of the enterprise.
The connection between bridge loans and venture financing!
Beginning entrepreneurs can apply for this type of loan from investors who have previously financed the company or dealt with the area of its development.
Moreover, the modern market offers an impressive number of venture funds whose main specialization is bridge sponsorship of their clients.
But we must remember that it is advisable to contact this type of financial division if bank investors for some reason refuse to provide funds for business development.
Situations in which bridge lending (or bridge notes) are literally the only financial source are not very uncommon for banks today.
The peculiarity of such situations lies in the fact that sometimes the interests of the dominant shareholders and borrowers in the same business can be mutually exclusive, i.e. literally contrary to the interests of both parties.
But, as a rule, it is the holders of bridge notes, not investors, who benefit from such “collisions.”
From all of the above, it follows that the main distinguishing feature of this lending is its direct connection with the project implementation plan: if the plan is drawn up clearly and the next step of development promises intensive profit growth, long-term financing is guaranteed to the borrower.
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Along with this, clients can apply for a loan not only for the successful implementation of a launched project, but also for their own urgent needs.
For example:
- repayment of other “burning” loans (most often overdue);
- making large purchases at competitive prices (transport, enterprises, land, etc.);
- financing expenses closely related to the reformation of leased space (this will make it possible in the near future to attract solvent tenants who are willing to pay several times more for space, which will increase the final profit of the premises owner);
- creation of an architectural (design) project in order to recreate, reconstruct, improve the external/internal appearance of the building (which will also help in the future to accelerate the growth of the owner’s profit);
- preparatory work with documentation and competitive decisions in order to obtain European financing for business development;
- acquisition of new expensive real estate (apartments, houses, cottages, etc.).
Popularity of bridge notes!
The notes have some features:
- Credit notes can be repaid at any time before the due date set by the investor. Commissions and penalties are not provided for in such cases;
- The rates of convertible notes are usually strictly fixed and are paid directly at the time of repayment of the debt. But there are exceptions, for example, a floating interest rate;
- Convertible debt notes are so-called obligations, which, if necessary, can be transferred (in full or in part) into shares of a “young” enterprise.
Before the bridge loan is issued, both parties sign a preliminary mutual agreement. The paper is an official document that reflects all the key agreements and mutual settlements between the management of the borrowing company and investors.
The terms for conversion of credit notes are generally specified in the shares. This is done automatically (at the time of the agreed day stipulated by the contract), or at the request of financial investors.
You need to know that annual rates should never be higher than 8%. If the borrower decides to transfer the bet into a share, he has the right to claim a discount, the amount of which ranges from 5 to 15% of the market value of the share.
Rules for granting venture loans!
If the bridge note is secured by collateral, the agreement signed between the investor and the note holder must list the contents of the collateral.
Collateral can be:
- all existing assets, as well as property of the company;
- patents (copyrights to a company's products or intellectual property).
Thus, loan borrowers have the opportunity to return the collateral if, during the financing process, investors are unable to provide the required amounts in full on time (regardless of the reason).
The nominal amounts of debt notes can be paid not only through a single payment, but also partially - that is, in evenly distributed tranches. Along with this, there are other methods of providing financial support to the borrower.
One of the possible schemes: investors are ready to provide a beginning entrepreneur with the entire agreed amount in advance in its full amount, but at the same time the enterprise will be able to use the money not immediately, but in parts.
In such credit conditions, note holders have more free space to maneuver their finances. This guarantees benefits if the company intends to contact other financial organizations in the shortest possible time in order to obtain sponsorship.
Example: The owner of the company will soon receive a very profitable deal that will be able to quickly cover all the financial needs of the company for a certain period. In such situations, there is no point in taking out a mountain of loans and then ending up in a debt trap.
In what areas can it be used?!
Mortgage lending also provides for the issuance of bridge notes. But in this case, debt notes have their own characteristics: here they are issued as a regular mortgage.
An illustrative example: an individual intends to sell residential space in order to use the proceeds to purchase more expensive real estate (within one year). Taking out a loan in such a situation is quite reasonable, and here’s why.
It will provide an opportunity to purchase new property without waiting for someone to buy the old living space.
Thus, we can draw the following conclusions: bridge lending is appropriate only when a person has a 100% guarantee of the possibility of short-term debt repayment. The loan is issued for a maximum of one year, therefore, the conditions for obtaining are a little stricter than
to individuals or legal entities for a period of up to one year at a sufficiently high interest rate to cover the borrower’s current obligations. As a rule, such a loan serves as a temporary measure and may not meet the real needs of the borrower, but is attracted in anticipation of primary, properly structured financing.The essence of a bridge loan is that the borrower repays the loan using funds received from another source of financing, which may be the sale of assets, real estate, etc. For example, in companies, a bridge loan can be a source of raising working capital for the acquisition fixed assets, while the proceeds from the sale of obsolete assets become a source of loan repayment. On the other hand, sometimes the source of repayment becomes the same bank that issued the bridge loan, that is, the parties initially intended further refinancing.
In mortgage lending
A bridge loan is also used as a type of mortgage when purchasing real estate. For example, a homeowner wants to sell his home to purchase another more expensive home. In this case, a bridge loan allows the borrower to purchase a new home without waiting for their current home to be sold.
Notes
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