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Commercial bridge loanCommercial bridge loans or hard money loans are short-term (generally 2 to 36 months) loans that help business enterprises to tide over any cash short fall before the anticipated receipts start trickling in. They provide flexibility that is very essential for businesses to run smoothly .
Why does a business need bridge loans in the first place? Bridge loans are essential because certain cash receipts and cash requirements cannot be predicted with precision. Suppose the business enterprise is acquiring some property . For closing the deal, it approaches the bankers. Bankers may take some time to examine the relevant papers and prospects. But the seller requires the funds at the earliest. In such a situation, business enterprises opt to avail a bridge loan to gain control over the property, otherwise they may miss out on crucial production time. Generally, bridge loans are availed by the businesses for purchasing some properties, or businesses, or some land development, or construction activity. They can also be utilized for interim cash requirements arising from normal business activity.
Why cant a business keep adequate reserve for such a situation as we do in personal finance?
Business enterprises are accountable to their investors. Consequently, they have to use the funds judiciously and optimally. If large chunks of funds were to be kept idle, then it would be difficult to generate adequate returns that the investors expect on their investment. This, in turn, may result in failure by the business to secure further capital from investors if and when a lucrative opportunity presents itself. Such a loss is termed as opportunity cost. It might result in competitor gaining the opportunity because investors do not consider the business adequately rewarding. Opportunities have an annoying habit of coming up suddenly . And most of these opportunities come with time constraints, forcing business enterprises to act swiftly.
At personal level, such temporary loans carry little or no interest. However, in businesses, such loans command higher interest rates than that on loans of longer tenure. This is because there are idle periods for lender\'s cash in such type of funding . Risks also play a role in increasing the interest rates . Collateral securities are generally inseparable part of commercial bridge loans. Properties like office buildings, machinery, property being acquired, office equipment, etc ., are usually pledged as collateral securities. The lenders also do due diligence, wherein they examine the credit history, liquidity of business, quality of contracts or properties that will generate income for repayment of loans, etc. Properties that can be used as collateral for securing the loan differ for small and large bridge loans. As bridge loans close quickly, they are extremely convenient for businesses. Quite often, however, businesses tend to refinance their bridge loans, through cheaper debts of longer tenure.
Who provides such commercial bridge loans?
There are many direct lenders and funding specialists who offer such funding. Many of them have websites on which the terms and conditions are clearly mentioned .
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