A bridge loan is a type of short-term loan, typically taken out for a period of 2 weeks to 3 years pending the arrangement of larger or longer-term financing. It is usually called a bridging loan in the United Kingdom, also known as a “caveat loan,” and also known in some applications as a swing loan. In South African usage, the term bridging finance is more common but is used in a more restricted sense than is common elsewhere.
A bridge loan is interim financing for an individual or business until permanent financing or the next stage of financing is 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. Bridge loans typically have a higher interest rate, points (points are essentially fees, 1 point equals 1% of the loan amount), 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.
