Bridge Loan

What Is a Bridge Loan?

A bridge loan is a short-term loan taken out to cover a temporary funding gap until a borrower obtains longer-term financing or receives money they are counting on. The name reflects its role: it bridges the period between two financial events. Borrowers usually plan to repay it from a known source, such as the sale of an existing asset or the proceeds of a larger financing round.

How It Works

Bridge loans are most common in real estate, though they also appear in corporate finance. Consider a homeowner who wants to buy a new house before selling the current one. The down payment on the new home may be due before the old home's sale proceeds arrive. A bridge loan can cover that gap, often secured by the equity in the existing property. When the old home sells, the proceeds repay the bridge loan. Because the arrangement depends on a future event, timing is central to how the loan is evaluated.

In corporate finance, a company might use a bridge loan to cover operating costs or an acquisition until it issues bonds or raises money through equity financing. Lenders typically charge a higher interest rate than on conventional long-term loans, plus an origination fee, to reflect the short timeframe and added risk. Because the loan is usually backed by collateral, the lender can claim the pledged asset if the borrower does not repay.

Advantages and Risks

Bridge loans can help borrowers act quickly, avoid missing a time-sensitive opportunity, and avoid selling an asset under pressure. Their drawbacks are significant, however. Costs can add up because of higher interest and fees, and the repayment window is short. If the expected sale or financing is delayed or falls through, the borrower may struggle to repay and could lose the collateral.

Investors who see bridge debt on a company's balance sheet often look at how the company plans to repay it and whether its cash flow supports that plan.