Bridge finance is a type of short-term loan which acts provides financial assistance to meet the short-term liquidity requirements. Bridge financing is a short-term loan or investment used to meet immediate financial needs until long-term financing is obtained. Think of it as a bridge that connects a company’s current financial position to its future financial stability.
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Bridge finance: Introduction
As the name suggests it acts as a bridge between the initial period and the time till one can get a permanent source of finance to meet his requirements. It is a gap financing arrangement. Must Check Suspense Account.
Example :
For example, ABC Ltd is a small-scale enterprise engaging in the business of oil refineries on a small scale. Suddenly as a result of their extremely good quality, they got a project worth 1 crore, For this, the company went to his banker and applied for the loan. It was said that the loan amount would be disbursed after 3 months due to the complexity of procedural aspects. Then if ABC Ltd goes to another lender/ same lender to obtain a loan that rescues them till the first loan is disbursed, it is called a bridge loan.
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Features of Bridge Finance :
(1) Short term oriented :
Bridge loans are oriented for short periods i.e. less than a year. The main objective of a bridge loan is to facilitate financial assistance to meet short-term financial requirements. When a new graduate wants to start his enterprise then definitely he needs financial backup to meet his working capital requirements and to facilitate the business with initial arrangements. In such case, if he opts to apply for bridge loans then it provides him the ability to meet above stated short-term requirements.
(2) High-interest costs :
As they are short-term oriented and the payback period is also less compared to the long-term industrial loans, they carry higher interest costs. As they come to the rescue in your financially unfavorable conditions they result in high interest costs. You may also like Net Present Value.
(3) Demands collateral security :
They demand collateral security. The top players who provide bridge loans in the economy ask for collateral security in almost all cases. The value of the security one can keep as collateral will directly influence the amount of loan the lender is willing to grant.
(4) Alternative modes of payment :
Bridge loans facilitate to repayment of the loan either before or after the actual permanent source of finance is secured. If a company wants to repay before then it improves the credit rating of the company with that lender so that they can even get long-term loans from the same lender. If they choose to repay the loan after the main source of finance is granted then they can do it out of the funds granted by the permanent source of funding for which they might have been waiting. Must Check Trial Balance.
