Bridge loan is a temporary short term loan taken by a person or company for a period ranging from 2-3 weeks to 52 weeks. Such loans are known as bridge loan because the loan helps in bridging the gap between short-term cash requirements and long-term loans or permanent source of funding. Bridge loans are also known as ‘Swing loan’, ‘Interim financing’ or ‘gap financing’.
Example 1: ABC public limited goes for an initial public offer of its shares or its credit proposal is under the process of sanction which is expected to be completed within six months. In the meantime the company needs interim funds requirement to meet the expenses of inventories, electricity bills, wages and salaries etc. The company may therefore approach its bankers for bridge loan to cover the working capital requirements till it gets the permanent source of funds.
Example 2: Mr. Satish Chandra wanted to sell his present house and buy a new one. He may approach a bank or financial institution for interim funding facility to meet his temporary liquidity requirement to buy the new house. The bridge loan availed by him allows him to make down payment to buy a new house and allows him to close the loan availed by him from the sale proceeds of old house. The bridge loan availed by Mr. Satish Chandra gives him enough time to wait for an opportunity and sell the existing property at a good price.
Since bridge loans are granted for shorter period, banks normally charge higher rate of interest on those loans compared to interest charged on housing loans. Bridge loans are usually backed by collateral security of immovable properties or other securities gold jewelleris, LIC policies, NSCs, equity shares, debentures etc.