Bridge loans in business finance are a short term financing arrangement. When long-term loans have phase-by-phase sanctions, the amount in each phase might not be sufficient. Sometimes long term loans in infrastructure can be delayed. To support immediate business finance requirements, bridge loans or swing loans are taken.
Bridge loans are important business finance vehicles. Without it, businesses or individuals can find it difficult to keep their business continuity. One main drawback of bridge loans is that they are expensive. Interest rates are high. Given the fact that most bridge loans are taken in real need, the bridge loan vendor might even demand equity. Collateral for the larger loan is used for bridge loans. Tough to classify it as collateral mortgage, but bridge loans leverage this arrangement for quick cash.
Bridge loans are common in India, given the nature of the Indian economy. Growing economies need flexible business finance options. News articles are abounding with companies taking bridge loans. Recently Sesa Goa took a bridge loan of around ` 2500 crores to fund its investment in Cairn India steel company. GMR infrastructure is another company that took a bridge loan of around $737 million to acquire equity presence in InterGen. The above two examples just highlight the corpus of amounts that companies take with regards to bridge loans.
Unlike other sectors, the real estate sector is often given a cold shoulder by bridge loan providers. Banks shy away from giving bridge loan business finance to this sector. Real estate in India is characterized by a lack of organization. Most real estate ventures are financially insecure, and not backed by fact. Banks face a tough time to convince its stakeholders to agree to giving bridge loans as business finance in this sector.
Even if property developers manage to obtain a bridge loan, it attracts high interest rates. Property developers use bridge loans to -show’ the property and sell advance bookings. Banks would also consider business finance options to semi-completed properties. Once the developers obtain advance booking amounts or bank loans, they use this to close the bridge loans.