Takeaways
- Bridge loans are high-interest-rate loans that provide immediate access to cash.
- Bridge loans are short-term, ranging from a couple of days to a few months.
- Homeowners use bridge loans to buy a new home while selling their current one.
- Bridge loans are used in real estate transactions and are backed by collateral.
- Businesses used bridge loans to meet cash flow shortfalls, such as purchasing new assets or inventory, launching new products, or buying a new office building.
What Is a Bridge Loan?
A bridge loan is a short-term, high-interest-rate loan that provides funds before a person or company pays a financial obligation or secures a longer-term financing solution. These loans typically come with above-average interest rates, are short-term, and are often secured by collateral.
Bridge loans can alleviate immediate cash flow needs and cover short-term funding gaps. These loans are commonly referred to as bridging loans, gap loans, or interim financing.[1] They are often used to purchase property or real estate, such as a new home when selling your current one, or to secure much-needed inventory for a business.
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How Bridge Loans Work
Bridge loans provide you with cash when you need to make a purchase but don’t have sufficient funds. Homeowners often use bridge loans to purchase a new home while selling an existing home.
It’s crucial to note that bridge loans are high-interest-rate loans with terms of a couple of months and require collateral to secure the loan. Businesses use this debt financing structure when they don’t want to raise equity capital (like issuing common stock) but need short-term cash to bridge a financing gap.
Whether you are using an interim loan for your business or personal use, you need to have a clean credit history. Generally speaking, debt lenders only offer bridge loans to customers or account holders with low debt-to-equity (DTI) ratios and a high credit score.
Read More: Is an 800 Credit Score High Enough?
Personal Use Bridge Loans
- High Interest Rates and Fees: The primary downside of using bridge loans is that you pay higher interest rates and origination fees compared to other lending mechanisms, such as home equity lines of credit (HELOCs), personal loans, or traditional business loans. If bridge loans are not repaid on time, interest expenses can accumulate quickly.
- Backed by Collateral: If you are using a bridge loan to make an offer on a home before your current house sells, you put your home at risk. Gap loans are typically backed by collateral, and if you default on your loan, your collateral is at risk.
- Could Foster Less Savings: If you have sufficient cash to pay for a down payment on a second home or property, you don’t need a bridge loan. If used unwisely, these loans can foster bad borrowing habits. You should exercise caution when using bridge loans and ensure that you can make your payments on time. Otherwise, you can damage your credit report.
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A bridge loan is a short-term financing solution to fill a funding gap until you secure more permanent financing or pay off a financial obligation. Bridge loans often carry higher interest rates than other types of credit facilities. The most common type of individual bridge loan is used by homeowners who are selling one home and want to purchase their new home immediately. Businesses use bridging loans to provide them with sufficient cash during periods of low or interrupted cash flow.
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- Fact Approval: Due diligence and approval for bridge loans are faster than those for traditional business loans. Companies can have credit facilities or lines of credit to draw upon for securing short-term funding. In exchange for quick approvals, companies pay elevated interest rates.
- Provides Immediate Cash Flow: Because the funding process is fast, companies can get the cash they need quickly. This reduces disruptions in business, payroll, or other business operations. The business can continue as normal once the bridging loan is repaid.
- Structured Repayment: The terms of bridge loans are clear from the start. Borrowers understand they are trading convenience for cost and are willing to pay elevated APY for almost instantaneous access to cash.
Read More: 9 Ways to Fund Your Business Quickly
Businesses can use bridge loans to finance gaps in cash flow or working capital. Many companies do this when they have a guaranteed order to fill or parts to manufacture.
For example, if a customer has placed a large order for a product and the company doesn’t have enough cash on hand to purchase the inputs for the product, it might need to take out a bridge loan. Once approved, the business will have the necessary funds to fulfill the order. Once the order is filled, the company can immediately pay back the gap loan.
Read Also: 9 Steps to Start Your Own Business
When Businesses Use Bridge Loans
Pros of Bridge Loans
Cons of Bridge Loans
Cons of Bridge Loans
Bridge loans are most often used in real estate transactions when you are moving and need to buy a new home before you sell your old home. For example, if you get a new job and need to move immediately, you might need to buy a home quickly.
Mortgage lenders will often lend a percentage of the new purchase price, typically between 80% and 90%, and require a down payment of between 10% and 20% of the purchase price. New homeowners need the cash for the down payment, but a bridge loan allows them to buy now and pay later. Applicants still need to pay origination and other loan-related costs, like inspection, credit report, and appraisal fees.
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(1) IRMI. Gap Financing. Last Accessed June 3, 2025.
