The building next door comes up for sale, and the seller wants to close in three weeks. Your bank needs two months to fund the long-term loan. Timing gaps like that come up often. A buyer has signed for your old location, but the closing falls after you need the new one. A large payment is approved for next quarter, and the opportunity in front of you is this month.
A bridge loan covers the stretch between now and that money. It’s short-term by design, and it’s taken with a specific payoff in view: the long-term loan, the sale or the payment that ends it.
How a bridge loan works
A bridge loan is usually one sum, paid out up front, for a term measured in weeks or months. Most run from a few weeks to about a year, and some run longer. Payments are often interest-only, with the balance due when the payoff arrives. Some have no payments along the way, just one repayment at the end.
Lenders offer it under names like bridge capital, bridge financing and interim financing. It may be secured by the property you’re buying or selling, by other business assets, or, for smaller amounts, mainly by your revenue.
The exit plan decides almost everything
The first thing a lender asks about a bridge loan is what pays it off, and when. Lenders call this the exit. The stronger it is, the better the terms tend to be.
Strong exits come with paperwork:
- A commitment letter from a bank for the long-term loan
- A signed purchase agreement for the property or business you’re selling
- An approved insurance claim with a payment date
- A signed contract with a payment schedule
Weaker exits are plans that aren’t in writing yet, such as a refinance you expect to apply for or a property you haven’t listed. A lender may still work with those, but expect a smaller amount, a higher cost, or both.
Plan for the exit running late. Ask what an extension costs before you need one, and build a few weeks of slack into your timeline.
When businesses use bridge financing
- Closing on a property or a business before the long-term loan is ready
- Moving into a new location before the old one sells
- Buying out a partner by a date set in your agreement
- Taking a supplier’s volume price or a one-time inventory buy before a season
- Carrying payroll and operating costs through an acquisition or a change of ownership
- Covering the wait for a large approved payment, such as an insurance settlement
For example, a restaurant group agrees to buy a second location from a retiring owner. The bank has approved the long-term loan, but its closing falls weeks after the date the seller set, and the seller has another buyer waiting. A bridge loan lets the group close on time, and the bank loan pays off the bridge when it funds.
What it costs
Bridge financing costs more per month than long-term financing. The lender is moving quickly, the term is short, and the payoff depends on an event that hasn’t happened yet. Expect an origination fee taken at the start, and in some agreements an exit fee, a minimum amount of interest, or a charge for extending the term.
Because the term is short, the total cost can be small next to what the deal is worth. Ask for three figures in dollars: what you receive, what you repay if the exit arrives on time, and what you repay if it arrives 60 days late. Then weigh both repayment figures against what the deal brings in.
How it compares with other financing
A business line of credit suits needs that come and go. If you already have a line large enough to cover the gap, drawing on it may cost less than a new bridge loan.
A term loan is paid down over years, while a bridge is meant to be replaced within months. A bridge is often paid off by exactly that kind of long-term loan.
Working capital is repaid out of your sales over a short term, so it suits a gap in day-to-day costs better than a purchase that has to close by a set date.
What a lender looks at
Expect questions about:
- The exit, and the documents behind it
- The value of any collateral, which can mean an appraisal for property
- Your cash flow, since payments may start while you wait
- Your time in business and your credit
- The deal itself, including the purchase agreement and the closing date
A one-page summary can save days. Cover what you’re buying or waiting on, the amount, the date you need the money, the date the exit is expected, and the documents that prove it. Add your recent business bank statements, and most of a lender’s first questions are answered before it asks them.
When a bridge is the wrong tool
A bridge works best for one gap with a known end. It fits less well when:
- The exit isn’t in writing, and the deal depends on financing nobody has approved yet
- The gap comes back every month or every season
- The cost of a late exit would wipe out what the deal earns
In those cases, settle the long-term financing first, or use a revolving line for a gap that repeats.
Questions to ask before you sign
- Are payments monthly, interest-only, or one repayment at the end?
- Is there a minimum amount of interest, or a fee for paying early?
- What happens, and what does it cost, if my exit is late?
- Which assets secure it, and is there a personal guarantee?
Plan your bridge
If you have a closing date or a payment date and need to move before it, start with bridge capital. If timing is the open question, see how long business funding takes. When you’re ready, apply from the bridge capital page. Applying takes a few minutes and won’t affect your credit score. We’ll review your application and match you with the options that fit.
