What is a bridge loan? Definition and FAQs

Published Tuesday 16 September 2025

Table of contents

• A bridge loan is a type of bridging finance
• Why use a bridge loan?
• 5 Features of bridge loans
• How to get a bridge loan
• Managing bridge loans with smart accounting
• FAQs on bridge loans

Key takeaways

• Evaluate bridge loans for urgent funding needs when you need capital within days or weeks, as they provide faster access to funds than traditional loans but come with higher interest rates and additional fees.
• Secure your bridge loan application by preparing a clear repayment plan, demonstrating how you'll pay back the loan through expected income, permanent financing, or asset sales.
• Protect your business assets by ensuring you have a solid exit strategy before taking a bridge loan, since these loans are typically secured against property, equipment, or inventory that you could lose if unable to repay.
• Consider talking to your existing bank first when seeking bridge loan options, as they already understand your business, though you should verify any lender holds an Australian credit licence and AFCA membership.

A bridge loan is a type of bridging finance

Bridging finance covers all types of short-term funding that 'bridge a gap' between immediate needs and future funding.

Bridge loans are the most common type of bridging finance for small businesses. They provide cash until you secure longer-term borrowing options.

Other types of bridging finance include:

• Equity bridge financing: Less relevant for small businesses
• IPO bridge financing: Used for public offerings, not small business operations

5 Features of bridge loans

Bridge loans share five key characteristics that make them different from traditional business loans:

1. Short timeframe: Usually 12 months or less, though some high-risk loans like those for pre-development sites have short loan tenors of up to two years
2. Fast approval: Rapid processing because they're designed for urgent funding needs
3. Higher costs: Interest rates are higher due to increased lender risk and shorter profit windows
4. Flexible repayment: Available as closed loans (with specific repayment dates) or open loans (flexible exit timing)
5. Collateral required: Secured against business assets like property, equipment, or inventory. For loans secured by a mortgage over real property, regulations may require the asset's market value to be at least 110% of the loan amount.

Why use a bridge loan?

You can use a bridge loan when you need quick funds to cover costs until you receive permanent financing or expected payments. A business bridge loan works like a home bridge loan, giving you money for your new purchase while you wait for other funds to come in.

Bridge loans are short-term loans. They help you respond to opportunities quickly and keep your business running until you receive more permanent funding or payments.

Use a bridge loan to:

• cover expenses such as payroll, utilities, rent and inventory costs while waiting for long-term financing, which might come in several payments
• manage seasonal fluctuations in cash flow
• cover temporary cash flow gaps, such as delays in receiving payments from customers or when recovering from a large capital expense
• cover expenses while waiting for an insurance claim to pay out
• respond to time-sensitive opportunities, such as launching a product line or taking advantage of a deal to buy property

For example, you own a restaurant and want to buy another one in a great location. The seller wants to move quickly, but your long-term loan approval will take months. You use a bridge loan to buy the restaurant now and repay it when your main loan is approved.

Bridge loan costs and considerations

Bridge loan costs vary significantly based on your business situation and the lender you choose.

Interest rates typically range from 8% to 15% annually, with some non-bank lenders charging interest of 15 per cent-plus, but some lenders charge monthly rates that can push costs much higher.

Common fees include:

• Application fees: Usually 1-2% of the loan amount
• Origination fees: 2-3% of the total loan
• Early repayment penalties: May apply if you repay before the minimum term

Cost comparison tip: Always calculate the total cost of borrowing, including all fees, before choosing a lender. A lower interest rate with high fees might cost more than a higher rate with minimal fees.

Bridge loans usually cost more than traditional loans. Make sure you understand all the costs before you apply.

Review the terms and conditions with your lender or financial advisor so you know all the costs.

How to get a bridge loan

Before applying for a bridge loan, answer three key planning questions:

• Timeline: How long will you need the funds?
• Purpose: How will you use the money?
• Repayment: How will you repay the loan?

Bridge loan requirements typically include:

Financial history: Established credit history and proof of repayment ability

Security: Collateral such as property, equipment, or inventory

Exit strategy: Clear plan for repayment, such as incoming customer payments or permanent financing approval

To learn more about getting approved for bridge and traditional loans, check out our guide How to get a business loan.

Talk to your bank

Start with your existing bank if you need a bridge loan. They already understand your business and financial history.

Explore specialist lenders if your bank doesn't offer bridge loans. As traditional bank lending falls, there has been a corresponding lift in lending by non-bank financial institutions, many of which specialise in short-term business financing.

Work with your accountant to prepare your application. They can help gather the financial information lenders require.

Use accounting software like Xero to streamline the process. Digital financial records make applications faster and more accurate.

Managing bridge loans with smart accounting

Bridge loan management becomes much easier with the right accounting systems in place.

Track loan performance by monitoring how the borrowed funds impact your cash flow and business operations.

Prepare for repayment by setting up automated reporting that shows when your permanent funding or customer payments are due to arrive.

Maintain clear records of how you use bridge loan funds. This documentation helps with tax planning and proves to lenders that you're managing the money responsibly.

Cloud-based accounting software like Xero can automate much of this tracking, giving you real-time visibility into your loan performance and repayment readiness. Try Xero for free to see how it can simplify your bridge loan management.

Once you've secured a bridge loan, managing it effectively is key to protecting your cash flow. This is where good financial habits and the right tools make a difference.

Using accounting software like Xero helps you stay on top of your new financial commitments. You can:

• Track loan repayments and interest costs to see their impact on your budget.
• Get a real-time view of your cash flow, so you know exactly when your permanent funding arrives.
• Easily generate financial reports to keep your lender and accountant updated.

By keeping your books organised, you can manage your bridge loan confidently and focus on new business opportunities.

FAQs on bridge loans

Here are some common questions small business owners have about bridge loans.

Is a bridge loan a good idea for my business?

A bridge loan can be a great idea if you need to act on a time-sensitive opportunity and have a clear, guaranteed plan for repayment. However, due to the high costs, it's not suitable for long-term funding or if your future income is uncertain.

What are the main risks of a bridge loan?

The biggest risk is if your planned long-term financing falls through, leaving you with a high-interest loan you can't repay. This could lead to significant debt and the potential loss of the collateral you used to secure the loan, such as property or inventory.

How quickly can I get a bridge loan?

One of the main benefits of a bridge loan is speed. While traditional loans can take months, bridge loans can often be approved and funded in a matter of weeks, or sometimes even days, depending on the lender and your circumstances.