Bridge Loan Definition

A business owner might need the bridge loan definition in two distinct situations: funding a purchase or development of real estate, or financing business obligations between capital funding rounds. A bridge loan is a short-term, accessible financing option with higher interest rates.

What is a bridge loan?

According to the bridge loan business definition, this type of financing is defined by its use as funding for immediate purchases. Commercial bridge loans can “bridge the gap” between a business’s current financing needs and a traditional, long-term financing solution. A bridge loan can be a fast, convenient way for a business to access funds.

Business owners who get a bridge loan should expect to pay higher interest rates for those short-term loans. It’s generally a good idea to pay off bridge loans quickly to avoid repayment penalties. pay higher interest rates in exchange for these short-term loans. Therefore, it’s a good idea to pay this kind of loan off quickly because they often don’t have repayment penalties.

Uses for Bridge Loans

Entrepreneurs might use a bridge loan in a variety of scenarios, such as:

• Investing in commercial real estate with an expectation of return;
• Filling gaps in financing until a subsequent capital funding round;
• Maintaining the business before an acquisition; or
• Stocking up on inventory.

While bridge loans are one way to get cash fast, a business owner who wants to apply for one likely needs excellent credit, a low debt-to-income ratio, and equity of at least 20%. Additionally, a lender offering a bridge loan typically requires collateral to secure the loan. Because repayment on these loans is due quickly, most entrepreneurs expect to have a windfall or permanent financing before the bridge loan is due.

Bridge Loan Benefits

Bridge loans can provide quick, short-term financing to keep a business running or growing. The advantages of the bridge loan include: 

• Immediate access to cash, usually within a week;
• Flexibility when shopping for real estate or planning for development;
• Generally a faster application, underwriting, and funding process than traditional loans;
• The business can take out financing without relying on business partners or relinquishing control;
• Stabilizing cash flow and covering business expenses while you’re waiting for payments;
• Short-term loans to be paid off within one year; and
• The owner can choose to repay the loan after securing long-term financing. 

A bridge loan is an excellent option if you need a quick influx of cash to maintain operations or make a purchase.

What are other bride loan considerations that business owners need to know?

In exchange for the bridge loan’s convenience, they typically have relatively short terms, high interest rates, and large origination fees. The other disadvantages of a bridge loan include:

• Collateral is typically needed to secure these loans, and the amount you can receive will depend on your collateral’s value;
• They have difficult application requirements, including a credit score above 650;
• High risk and liability if the business owner can’t repay the debt;
• Higher rates mean higher monthly payments;
• Short-term loans mean there’s a shorter time to generate funds for repayment; and
• If the business owner defaults on the loan, the lender will seize and sell their property.

While there is a right time for a small business to use a bridge loan, they’re not for everyone. Business owners would be wise to consult with an attorney or financial advisor before making any decisions that can affect their credit.

Other Names for a Bridge Loan

Other terms that match the definition of a bridge loan include:

• Bridge financing,
• Bridging loans,
• Interim financing, 
• Gap financing, and 
• Swing loans.

No matter the term used, a loan falls into this category if it’s used for an immediate purchase, and the person who takes the loan expects to repay the debt quickly. 

Summary

A bridge loan is a short-term, high-interest loan meant to finance an immediate purchase or fill a financing gap. While bridge loans can be an easy way to get cash quickly, they come with risks and costs unique to this type of loan.

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ZenBusiness Can Help

While ZenBusiness doesn’t offer bridge loans, they can help business owners with other services, like setting up a new business through their LLC formation or corporation formation services. They also offer a Worry-Free Compliance Service that makes it easy to keep a business running compliantly.