Bridge Loan
A bridge loan is short-term financing designed to "bridge" the gap between an immediate need for cash and a longer-term funding source. They typically last 6–18 months and carry higher interest rates than traditional loans because they're meant to be temporary. Businesses use them when they need mon
Bridge Loan Definition
A bridge loan is short-term financing designed to "bridge" the gap between an immediate need for cash and a longer-term funding source. They typically last 6–18 months and carry higher interest rates than traditional loans because they're meant to be temporary. Businesses use them when they need money now but expect permanent financing, a sale, or revenue to pay it off soon.
Bridge Loan in Practice — Example
Taylor owns a growing e-commerce brand and found a perfect 5,000 sq ft warehouse for $400,000. She's already approved for an SBA loan, but it won't close for 60 days. The seller needs to close in two weeks or they're going with another buyer. Taylor takes a bridge loan for $400,000 at 10% interest to close immediately, then pays it off with the SBA loan proceeds when they arrive. Cost: about $3,300 in interest for two months — worth it to secure a location she'd been searching for all year.
Why Bridge Loans Matter for Your Business
Speed is the bridge loan's superpower. Traditional financing takes weeks or months; bridge loans can close in days. When a time-sensitive opportunity appears — buying inventory at a steep discount, securing real estate, or covering payroll during a cash flow gap — a bridge loan lets you act now.
The downside is cost. Bridge loans carry higher interest rates (typically 8–15%) and often include origination fees of 1–3%. They're expensive money, so they only make sense when the opportunity cost of waiting exceeds the borrowing cost. If the deal you're chasing doesn't justify the premium, wait for cheaper financing.
Bridge loans also carry rollover risk. If your expected permanent financing falls through or the sale you were counting on doesn't happen, you're stuck with expensive debt and no plan to pay it off. Always have a clear, realistic exit strategy before taking a bridge loan.
How Bridge Loans Work
| Feature | Typical Terms |
|---|---|
| Term | 6–18 months |
| Interest Rate | 8–15% |
| Origination Fee | 1–3% |
| Collateral | Usually required (property, inventory, receivables) |
| Repayment | Lump sum at maturity or when permanent financing closes |
| Approval Speed | Days to 2 weeks |
Bridge loans are often interest-only during the term, with the full principal due at maturity. This keeps monthly payments low but means you need a lump-sum exit plan.
Bridge Loan vs Line of Credit
A bridge loan is a fixed-amount, short-term loan for a specific purpose. A line of credit is a revolving facility you can draw from as needed. Lines of credit are better for ongoing cash flow management; bridge loans are better for one-time, time-sensitive needs. Lines of credit are also typically cheaper but harder to qualify for in large amounts.
FAQ
Q: Can a startup get a bridge loan?
A: It's difficult without collateral or revenue history. Most bridge lenders want to see clear repayment sources — an approved loan, pending sale, or committed investor round. Some startup bridge loans are structured as convertible notes from investors.
Q: What happens if I can't pay off the bridge loan on time?
A: Most bridge lenders charge penalty rates or fees for extensions. In the worst case, they can seize your collateral. This is why a solid exit strategy is non-negotiable before signing.
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