What Is a Bridge Loan & How to Use It

Kelly Boyer SagertUpdated August 16, 2022

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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.

If you’re seeking funding for your small business, you may have heard about bridge lending. A bridge loan can offer cash flow in the short-term if you have costs to cover before other financing comes through. In other words, bridge loans can save a business in a pinch — whether that's a delay in customer payment or a need to cover costs before an insurance claim comes through.In this post, we’ll answer questions you may have about this type of loan, such as what a bridge loan is exactly, how they’re typically used, their pros and cons and more.

What Is a Bridge Loan?

A bridge loan is a type of short-term form of 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 bridging 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 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, so these lending programs are designed to provide that. 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 a lump sum interest payment at the end of the loan term. In still 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, bridge loans also tend to have hefty origination fees, among other fees.

How Does Bridge Lending 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 can be a bridging 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. Here’s a related scenario: A business may find a building that’s ideally located but the structure needs rehabbed. The owner might use a bridge loan to buy and fix up the property, and then apply for a traditional mortgage once it’s in better shape. Just like with any other type of loan, different lenders will have different lending programs. When comparing bridging loans, two aspects to consider include:

Speed of funding: Businesses typically seek these types of loans because they have an urgent funding need. So, spread your net a bit wider and 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. So, ask lenders if you can receive a prepayment discount or otherwise save money by paying it off early.

Also ask each lender if they offer open or closed bridge loans. Open bridge loans don’t have hard and fast repayment dates; this offers more flexibility but may come with higher interest rates and make it more difficult to get approved. Closed loans, meanwhile, have a set payoff date and, in return, can be easier to obtain with lower interest rates.

What Are the Pros and Cons of Using Bridge Loans?

Pros

Businesses can get cash fast for immediate needs.
To facilitate the fast need for funds, the application, underwriting and funding process is typically streamlined.
Money can be spent in flexible ways.

Cons

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

What Are Common Uses for Bridge Loans?

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

What Are the Alternatives to Using a Bridge Loan?

Before seeking small business funding, a business might decide to explore small business grants (assuming that time is not of the essence). Unlike with loans, these are lump sums awarded by federal, state or local governments or by private corporations that don't need to be repaid. Sometimes, however, there are restrictions on how the funds can be used but that isn’t always the case.Other types of business loans exist, including the following:

Business line of credit: Also called a commercial line of credit, this type of loan 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: These are loans guaranteed by the U.S. Small Business Administration (SBA) and offered by certain lenders. Loan programs 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.

Looking for a small business loan without collateral? Benefits include faster approval times and no risk of assets being repossessed if payments aren’t made on time. Interest rates tend to be higher, though, and you’re still required to pay the money back, even without collateral.

The Takeaway

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, among other reasons. There are pros and cons, though, to bridging loans, such as higher interest rates. 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 small business loans that don’t require collateral and more. Lantern can help you explore small business loans to find the right option for you.

Photo credit: iStock/

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About the Author

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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