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What is a Bridging Loan Used for?


You may have inadvertently used the old phrase, “We’ll cross that bridge when we come to it”. It is a saying used for troubled times ahead that should not be worried about now. In its proverbial sense, you can do the bridge crossing when you arrive at the bridge, and not before.

In financial terms, you can bridge a period of zero cash flow with an injection of money. This usually comes in the form of a loan (like from UK Development Finance) and is used to cover a period of financial weakness before payday. Bridging loans are typically short term. In many cases, the loan period can be just two weeks.

Most employees are paid monthly these days and many of those who struggle to get through the 30 days or so by stretching out their cash find the money runs out after just 14 or 15 days. This means the same period must be suffered with no cash in the bank. This is where a bridging loan is required to tide you over through the two weeks until payday comes and the money can then be paid back.

There are many variants of bridging loans: some finance companies may loan you cash and ask for a small part of the loan to be repaid at payday. Then the remaining balance can be repaid the following payday, and again on the one after that. This prevents you getting into the same cash flow crisis exactly a month later than the original debt period occurred.

Typically a bridging loan can be taken out very quickly. Little in the way of documentation is necessary and a decision by the financing company or lender can be made within the hour, sometimes shorter.

So, why would we take out a bridging loan? A typical example of such a financing deal would be where companies or individuals are awaiting a permit approval to be sought during a home refurb project or a new build. No money can come in and help with the profits during this period, so a bridging loan works in a dynamic way here.

When we move homes, we can often wait for a period exceeding the time when the new house is expecting the first down payment. The home we have moved from has still not closed and there is no money to place the first payment due on the new place. A bridging loan is used with great effect here.

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