Bridging finance loans in Australia (or Bridging finance) is a method, which allows to purchase/finance assets before a formal loan is approved. It is a quick way to get hold of the investment while still waiting for the bank to grant the money.
The borrower often needs money quickly as there might be not enough time for the formal approvals.
Therefore, bridging finance loans have a high risk for the lender. The high risk means that the borrower is charged a higher interest rate. Often, the interest is as high as 100% of the standard banking rates. There are two types of bridging loans:
The closed bridging loans stipulate the date by which the borrower will repay the loan. The open bridging loan does not have an exact exit date. Therefore, close bridging loans offer less risk to the lender and thus carry lower interest rate. The open bridging loans are of the higher risk and are usually requested by investors who are still looking for the land or property.
Bridging finance in Australia is only applicable for investments, which must be purchased immediately before a formal bank loan is obtained. Thus, the borrower must be sure that both the investment is worth the risk and that bank will eventually grant the money.
The situations vary and often apply to large corporations.
For example, land developers may still wait for the permit but they need to secure funds to carry pre-construction works. Once the permit is granted, they approach formal banking institutions to obtain the low interest loan. Meantime (thanks to the bridging loan), the necessary works have already been completed speeding the project ahead.
Another situation could be a property, which needs to be settled quickly. The investor knows that banks will provide the finance but he cannot wait for the formal approval. In this case, bridging loan will secure the investment. Banks will later refinance the loan but on much lower interest rate.
The ordinary banks usually do not provide the bridging finance in Australia (except for home loans). The high risk of bridging finance loans often is unacceptable to the board of directors or share holders of banking institutions. However, there are specialised lenders who succeeded in the business of the bridging finance in Australia: