Bridge loan: what it is, costs and how it works for business

Published Wednesday 4 March 2026

Table of contents

• How does a bridge loan work?
• Types of bridge loans
• Why use a bridge loan?
• How much do bridge loans cost?
• Features of bridge loans
• Bridge loans: for and against
• How to get a bridge loan
• Manage your bridge loan finances with Xero
• FAQs on bridge loans

Key takeaways

• Apply for bridge loans only when you have a clear repayment plan and need funds faster than traditional financing allows, as these short-term loans typically cost 0.5% to 1.5% per month plus additional fees.
• Choose closed bridge loans over open ones when you know exactly when your permanent financing will arrive, as they offer lower interest rates due to the fixed repayment date that reduces lender risk.
• Secure your bridge loan against valuable collateral like property or equipment, but understand that you risk losing these assets if your expected funding falls through and you can't repay on time.
• Start your application process with your existing bank first, as they already know your business and can often provide faster approval, then compare total borrowing costs from multiple lenders rather than just headline interest rates.

How does a bridge loan work?

A bridge loan provides short-term funds secured against an asset, which you repay once your permanent financing or expected payment arrives. The loan "bridges" the gap between needing money now and receiving it later.

Bridge loans are one type of bridging finance, the general term for short-term funding that bridges a gap. You may also hear them called gap financing, swing loans, or debt bridge financing.

Here's how the process typically works:

1. Apply with collateral: You secure the loan against an asset like property, equipment, or inventory
2. Receive funds quickly: Approval and funding often happen within days, not weeks
3. Make interest payments: During the loan term, you typically pay interest only
4. Repay the principal: When your permanent financing arrives or your asset sells, you repay the full loan amount

Most bridge loans run for 12 months or less. The short timeframe and higher risk mean interest rates are typically higher than traditional loans.

Types of bridge loans

Bridge loans come in two main types based on their repayment structure. The type you choose affects your interest rate and how much flexibility you have.

Closed bridge loans

A closed bridge loan has a fixed repayment date. You agree upfront when you'll repay, typically tied to a specific event like receiving permanent financing or completing a property sale.

Closed loans are:

• easier to obtain: lenders prefer the certainty of a defined exit
• lower cost: fixed repayment dates typically mean lower interest rates
• best for: situations where you know exactly when funds will arrive

Open bridge loans

An open bridge loan has no fixed repayment date, though you still must repay within the loan term (usually 12 months or less).

Open loans are:

• more flexible: useful when your exit timing is uncertain
• higher cost: lenders charge more for the added risk
• best for: situations where you expect funds but can't confirm exact timing

Why use a bridge loan?

Bridge loans help you act fast when timing matters. You get quick access to funds while waiting for permanent financing or expected payments to arrive.

A business bridge loan works similarly to a residential bridge loan (sometimes called a "swing loan"), which gives homeowners money for a new property while waiting for their current home to sell.

Bridge loans are useful when you need to:

• respond to time-sensitive opportunities before competitors
• continue operations while waiting for long-term financing approval
• honour supplier payments during temporary cash flow gaps

Examples of bridge loan uses

Use a bridge loan to:

• cover operating expenses: pay for payroll, utilities, rent, and inventory while waiting for long-term financing that may arrive in several payments
• manage seasonal cash flow: smooth out revenue fluctuations during slower periods
• bridge payment delays: cover gaps when customer payments are late or after a large capital expense
• wait for insurance payouts: maintain operations while a claim is being processed
• seize time-sensitive opportunities: launch a product line or secure a property deal before the window closes

Imagine you own a popular restaurant and spot an opportunity to expand. Another restaurant owner is selling their business in an area with excellent demographics, but they want to sell quickly.

You're ready to buy, but long-term financing approval will take several months. A bridge loan lets you secure the property now and repay the loan once your permanent financing comes through.

How much do bridge loans cost?

Bridge loans cost more than traditional financing due to their short-term nature and higher risk. Interest rates typically range from 0.5% to 1.5% per month, though rates vary based on your circumstances and lender.

Bridge loan costs include:

• interest rates: often calculated monthly rather than annually, which can significantly increase total cost
• arrangement fees: typically 1% to 2% of the loan amount to set up the loan
• exit fees: some lenders charge a fee when you repay early or at the end of the term
• valuation fees: cost of professionally valuing your collateral
• legal fees: costs for legal documentation and processing

Several factors affect your rate:

• loan-to-value ratio: borrowing less relative to your collateral value usually means lower rates. For these loans, loan-to-value (LTV) ratios generally do not exceed 65% for commercial properties or 80% for residential ones.
• loan term: shorter terms may have lower total costs despite higher monthly rates
• exit certainty: closed loans with clear repayment plans typically cost less than open loans
• your credit profile: stronger credit history can help secure better terms

Always get quotes from multiple lenders and compare the total cost of borrowing, not just the headline interest rate.

Features of bridge loans

Bridge loans share several key characteristics:

• short term: typically 12 months or less
• fast approval: quick turnaround because they're designed for urgent funding needs
• higher interest rates: lenders charge more due to increased risk and shorter profit window
• secured by collateral: backed by assets like property or inventory to reduce lender risk
• flexible repayment: available with closed (fixed exit date) or open (flexible) terms

Bridge loans: for and against

When used wisely, bridge loans offer several advantages:

• speed: funding can happen in less than a week. This is crucial for time-sensitive situations like auction property purchases where a buyer may only have 14–28 days to complete a sale. Traditional term loans are often not viable in this timeframe.
• higher borrowing limits: asset-backed security lets you borrow more than credit cards or lines of credit allow
• flexible terms: options include open or closed repayment, fixed or variable rates, and interest-only or capitalised payments

Bridge loans also have disadvantages to consider:

• high interest rates: some lenders calculate interest monthly rather than annually, which can significantly increase costs
• additional fees: setup fees and early exit fees may apply
• collateral risk: you could lose your secured asset if permanent funding falls through and you can't repay

How to get a bridge loan

To get a bridge loan, you'll need to demonstrate your ability to repay and provide collateral. Before applying, consider how long you'll need the funds, what you'll use them for, and how you'll repay.

Most lenders require:

• acceptable credit history: demonstrates your track record of managing debt
• collateral: assets like property, equipment, or inventory to secure the loan
• proof of repayment ability: evidence you can meet payment obligations
• clear exit plan: documentation of incoming funds, such as a customer payment or approved long-term financing

Talk to your bank

If you need a bridge loan, talk to your bank first. You've already built a relationship, and your bank knows your business best.

Not all banks offer bridge loans. If yours doesn't, look for specialist providers, but make sure you deal with reputable lenders.

Your accountant can advise you and help prepare the financial information you'll need for your application. Using small business accounting software like Xero makes this process faster by keeping your financial records organised and accessible.

Manage your bridge loan finances with Xero

A bridge loan can help your business move fast when opportunities arise. Manage your cash flow carefully during the loan period so you're ready to repay when your permanent financing arrives.

Seeing your finances clearly makes this easier. Track your loan repayments, monitor cash flow, and keep your financial records organised so you're prepared for your exit date.

Your accountant can help you stay on track. Or use accounting software like Xero to manage your finances yourself. Get one month free and see how Xero helps you stay in control of your business finances.

FAQs on bridge loans

Common questions about bridge loans for small businesses.

Is a bridge loan a good idea for my business?

A bridge loan makes sense when you have a clear repayment plan and need funds faster than traditional financing allows. Consider alternatives like business lines of credit if you're unsure when you'll be able to repay.

What are the main downsides of bridge loans?

The main downsides are higher interest rates, additional fees, and the risk of losing your collateral if you can't repay. Bridge loans can also strain cash flow if your permanent financing takes longer than expected.

How long does it take to get approved for a bridge loan?

Lenders can approve and fund most bridge loans within one to two weeks. Some lenders offer even faster turnaround, with funding possible in under a week for straightforward applications.

What's the difference between a closed and open bridge loan?

A closed bridge loan has a fixed repayment date tied to a specific event, while an open bridge loan has no set repayment date within the loan term. Closed loans typically have lower interest rates because they carry less risk for lenders.

What happens if I can't repay my bridge loan on time?

If you can't repay on time, you may face penalty fees, higher interest rates, or the lender may take possession of your collateral. Contact your lender early if you anticipate repayment issues, as some may offer extensions or restructuring options.