Bridge Loan Definition

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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. The meaning of a bridge loan is a short-term, accessible financing option with higher interest rates.

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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. You should expect to 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 these examples:

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 a bridge loan 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 your 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 you can pay off within one year; and
You can choose to repay the loan after you secure 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 Bridge Loan Considerations I 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 you can’t repay the debt;
Higher rates mean higher monthly payments;
Short term loans mean you have a shorter time to generate funds for repayment; and
If you default on your loan, the lender will seize and sell your property.

While there is a right time for a small business to use a bridge loan, they’re not for everyone. It’s a good idea to consult your attorney or financial advisor before making any decisions that can affect your 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 you use, a loan falls into this category if you use it for an immediate purchase and expect 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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Disclaimer: The content on this page is for informational purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.