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Commercial Bridge Loans Explained

What Is a Bridge Loan & How to Use It
Kelly Boyer Sagert
Kelly Boyer SagertUpdated October 27, 2023
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If you’re seeking funding for your small business, you may have heard about bridge lending. A business bridge loan, also known as a commercial bridge loan, can offer cash flow in the short-term if you have costs to cover before other financing comes through. In other words, commercial bridge loans can save a business in a pinch, especially when it comes to purchasing real estate.Keep reading to learn more about what a commercial bridge loan is, how they’re typically used, their pros and cons, and more. 

What Is a Commercial Bridge Loan?

A commercial bridge loan is a type of short-term financing that effectively bridges the gap between the time of application and when another form of cash or funding will be available. That’s why bridge lending can also be called gap financing or interim financing.Because of their purpose, bridge loans have short terms, typically up to one year. These loans are usually secured, meaning they’re backed by collateral of some type, such as inventory or real estate. Bridge loans also generally have higher interest rates compared to traditional loans.

How Do They Work?

Let’s say that a business wants to buy a piece of property that’s located next to their building to expand parking spots. They won’t have the cash necessary to make the down payment on that property and pay the closing costs for another four or five months. They’re afraid that, if they wait that long to make an offer, someone else will snap up this prime piece of real estate. The solution could be a commercial bridge loan.This business could take out a bridge loan by using the equity in their current building to fund the purchase of the new property. This type of loan can also combine the mortgage of both of these properties, at least in the short term, so the business only needs to manage one real estate loan.Then, the business would likely refinance their properties in more traditional ways, looking for an affordable, long-term mortgage. Just like with any other type of loan, different lenders will have different lending programs. When comparing commercial bridge loans, two aspects to consider include:
  • Speed of funding: Businesses typically seek these types of loans because they have an urgent funding need. Check a variety of lenders to find one that can meet your timeline.
  • Incentives to prepay: This is a short-term form of funding — in other words, a temporary loan. Ask lenders if you can receive a prepayment discount or otherwise save money by paying it off even earlier. 
Also, ask each lender if they offer open or closed bridge loans. Open bridge loans don’t have hard and fast repayment dates, offering more flexibility. These may come with higher interest rates and make it more difficult to get approved, though. Closed loans, on the other hand, have a set payoff date and, in return, can be easier to obtain with lower interest rates.

How Are They Different From Traditional Loans?

People typically take out a bridge loan because they need fast access to cash for a short period of time. Traditional loans usually have a longer approval process and almost always have a longer term. Sometimes, repayment of a bridge loan resembles that of traditional loans, with a monthly payment required. Other times, the borrower would make interest-only payments until the end of the loan term, and then make one final payment to pay the loan off. And in other cases, the interest owed is taken from the loan amount at the time of closing.As mentioned above, bridge loans also tend to be more expensive than traditional loans. Not only do they usually have higher interest rates, but bridge loans also tend to have hefty origination fees.

Pros and Cons of Commercial Bridge Loans

Pros

  • Businesses can get cash fast for immediate needs, typically real estate.
  • To facilitate the fast need for funds, the application, underwriting, and funding processes are typically streamlined.
  • Can be used to cover day-to-day expenses while a transaction is in progress.

Cons

  • Interest rates are higher than many other loan types.
  • This is a secured loan with property serving as collateral.
  • They often have high origination fees.

Common Uses for Commercial Bridge Loans

Although commercial bridge lending is often used when purchasing real estate, there are other reasons that a business may look into a bridge loan.

Fix-and-Flip Project

A fix-and-flip project involves purchasing a property, fixing it up or renovating it, and selling it for a profit. This is typically done over the course of a few months. Because bridge loans are short-term financing options, they can be used to purchase and fund these types of projects. Once the home is resold, the money can be used to pay off the loan.

Delay in Customer Payment

Let’s say that a business offers services to other businesses (meaning it’s a B2B company), and they invoice their customers for payment. The company would then use the money paid on these invoices to cover payroll, rent, utilities, and other expenses. If customers don’t pay on time, they still need to pay their own bills — and so they could use this type of loan to bridge their cash flow issues.

Expanding Your Business

A small manufacturing firm, for example, may have an opportunity to expand their services but need to buy new equipment to do so. Perhaps they’ll go to an auction to get the best pricing, which means they’d need to have funds without knowing exactly what they’ll purchase, which would make it challenging to obtain conventional financing ahead of time. Bridge lending can offer a solution in this scenario.

Insurance Claims

When a business leverages bridge lending, they can use the money in ways they see fit. So, if there’s some sort of disaster (a fire, flood, or tornado, for example), then a business could use the funding to take care of immediate expenses while waiting for business insurance claims to be processed.

Buying Inventory

Sometimes, businesses use bridge lending services when they need to buy inventory to sell. For instance, they may need to restock their shelves after sales increased or get ready for the holiday season. The business could then pay off the loan through sales proceeds or by refinancing to another type of business loan.

Where Can I Get a Commercial Bridge Loan?

You can get a commercial bridge loan through a bank, credit union, private lender, or online lender. Banks and credit unions may offer lower rates than direct and online lenders, but it may take longer to get approved and the requirements may be more stringent. Direct lenders typically have less strict requirements, and may offer interest-only payments for the first few years until the final payment is due.Like with other types of small business loans, you’ll want to shop around to find the best rate and terms for your situation. 

Alternatives to Commercial Bridge Loans

If a commercial bridge loan is not right for you, there are other options to secure small business financing, including:
  • Small business grants: Small business grants are lump sums awarded by federal, state, or local governments or by private corporations that do not need to be repaid. 
  • Small business loan: Traditional small business loans can be short or long-term, be backed with collateral or have no collateral, and can come with competitive interest rates for those with good credit scores.
  • Business line of credit: A business line of credit gives a business access to funding where interest is charged on the outstanding balance, not on the amount that’s available to use. Businesses can use the funds as needed and repay them in a revolving manner, as long as they don’t exceed the approved limit.
  • SBA loans: SBA loans are guaranteed by the U.S. Small Business Administration (SBA) and offered by certain lenders. Loans are available up to $5 million to cover a wide range of business needs.
  • Invoice factoring: With invoice factoring, businesses can use their unpaid customer invoices as collateral. This helps B2B companies to manage their cash flow with the factoring company, which is then responsible for collecting the outstanding amount.

The Takeaway

Commercial bridge lending can provide businesses with a fast influx of cash on a short-term basis. Business owners can leverage this funding to buy real estate, expand operations, and manage cash flow. There are pros and cons, though, to bridge loans, such as higher interest rates and shorter repayment terms. If this type of lending isn’t right for you, there are other types of small business funding to consider, including SBA loans, invoice factoring, and long-term small business loans. Lantern by SoFi can help you explore small business loans to find the right option for you. With just a single application, you’ll be given a small business loan option from one of our top lenders, all with no obligation to you.

Frequently Asked Questions

What is a commercial bridge loan?
What are the cons to a commercial bridge loan?
How is a commercial bridge loan different from a traditional loan?
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About the Author

Kelly Boyer Sagert

Kelly Boyer Sagert

Kelly Boyer Sagert is an Emmy Award-nominated writer with decades of professional writing experience. As she was getting her writing career off the ground, she spent several years working at a savings and loan institution, working in the following departments: savings, loans, IRAs, and auditing. She has published thousands of pieces online and in print.
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