What is a bridge loan and how does it work?

Published Tuesday 5 May 2026

Table of contents

• What is a bridge loan?
• How bridge loans work
• Why use a bridge loan?
• Types of bridge loans
• How much does a bridge loan cost?
• Bridge loans vs traditional financing
• Pros and cons of bridge loans
• Alternatives to bridge loans
• How to get a bridge loan
• Manage your bridge loan finances with Xero
• FAQs on bridge loans

Key takeaways

• A bridge loan is a short-term, secured loan that gives you quick access to funds while you wait for permanent financing or the sale of an asset.
• Bridge loans typically cost more than traditional financing, with interest rates often calculated monthly and additional fees for applications, valuations, and exits.
• Prepare a clear exit plan showing how you'll repay the loan, whether through a property sale, permanent financing, or confirmed customer payments, as this significantly improves your approval chances.
• Consider alternatives like invoice financing, business lines of credit, or overdrafts if a bridge loan doesn't suit your situation or budget.

What is a bridge loan?

A bridge loan is a short-term, secured loan that provides quick access to funds while you wait for permanent financing or the sale of an asset. It "bridges" the gap between an immediate need for capital and a longer-term funding solution.

Bridge loans are commonly used in property transactions, where a buyer needs to purchase a new property before selling their existing one. In New Zealand and Australia, this type of lending is sometimes called bridging finance, though bridge loans also serve a wider range of business purposes.

For small businesses, bridge loans can cover operating costs, fund time-sensitive opportunities, or smooth out cash flow gaps while longer-term funding is arranged. They're designed for speed, with some lenders approving and releasing funds within days.

How bridge loans work

Bridge loans provide quick access to cash through a streamlined process that differs from traditional lending. Here's how the process typically works:

1. Apply with your lender: submit your application with proof of collateral, credit history, and your exit plan showing how you'll repay the loan
2. Receive approval: lenders can approve bridge loans in days rather than the months required for traditional financing
3. Access your funds: once approved, funds are released quickly so you can act on your opportunity
4. Repay when your exit event occurs: you repay the loan plus interest when you sell your property, receive permanent financing, or complete your planned exit

Peak debt and end debt

If you're using a bridge loan to buy property before selling your existing one, two key concepts affect how much you'll borrow and repay.

Peak debt is the maximum amount you owe at any point during the loan, typically when you hold both properties at once. It includes the new purchase price plus any remaining mortgage on your current property.

End debt is what you'll owe after your existing property sells and that money is applied to the loan. Lenders assess both figures when deciding whether to approve your application and setting your loan terms.

Bridging finance vs bridge loans

Bridging finance is the umbrella term for short-term funding that bridges a gap between transactions. A bridge loan is one specific type of bridging finance. Other types, like equity bridge financing and IPO bridge financing, aren't typically used by small businesses.

Why use a bridge loan?

Bridge loans give your business quick access to funds when you can't wait for traditional financing. They help you respond to time-sensitive opportunities, cover operating expenses during cash flow gaps, and keep paying suppliers while you wait for permanent funding to arrive.

Examples of bridge loan uses

Bridge loans suit a range of business situations. You might use a bridge loan to:

• cover operating costs like payroll, utilities, rent, and inventory while waiting for long-term financing
• manage seasonal gaps by smoothing out cash flow fluctuations during slower periods
• bridge payment delays when customer payments are late or after a large capital expense
• wait for insurance payouts to keep the business running while a claim is processed
• act on opportunities like property deals, product launches, or other time-sensitive investments

For example, say you own a popular restaurant and another owner wants to sell their venue in a prime location. You're ready to expand, but traditional financing will take months to approve and the seller wants to move quickly. A bridge loan lets you buy the restaurant now and repay the loan once your long-term financing comes through.

Types of bridge loans

Bridge loans come in two main types, each suited to different situations and exit strategies.

Closed bridge loans

Closed bridge loans have a specific repayment date tied to a confirmed exit event. You might use a closed loan when:

• you have a signed sale agreement on your existing property
• your permanent financing has been approved and is awaiting settlement
• you're expecting a confirmed payment from a customer or insurance claim

Closed loans are easier to obtain and typically have lower interest rates because the lender has certainty about repayment.

Open bridge loans

Open bridge loans don't have a fixed repayment date, though you still need to repay within the loan term. You might use an open loan when:

• you're selling property but don't have a buyer yet
• your permanent financing is still being assessed
• you're pursuing an opportunity with an uncertain timeline

Open loans are harder to obtain and carry higher interest rates because the lender takes on more risk.

How much does a bridge loan cost?

Bridge loans typically cost more than traditional financing, but the speed and flexibility can justify the expense for the right situation. In New Zealand and Australia, interest rates on bridging loans generally range from around 6% to 10% per annum, though rates vary by lender, loan-to-value ratio (LVR), and risk profile.

Expect to pay for:

• interest rates: typically higher than standard business loans, often calculated monthly rather than annually
• application fees: charged when you submit your loan application
• valuation fees: covering the cost of assessing your collateral
• exit fees: some lenders charge when you repay early or at the end of the term

Most bridge loans use rolled-up interest, meaning you don't make monthly repayments. Instead, the interest accrues and you repay the full amount, including interest, when your exit event occurs.

Deposit requirements

You'll usually need to cover 20-40% of the asset's value with your own funds or existing equity. The exact amount depends on the lender's LVR requirements and the type of asset you're securing the loan against.

The total cost depends on your loan amount, term length, and how interest is calculated. Ask your lender for a complete breakdown before you commit.

Bridge loans vs traditional financing

Bridge loans and traditional business loans serve different purposes, so choosing between them depends on your timeline and situation. Here's how they compare across the key factors:

• Speed: bridge loans can be approved in days, while traditional loans often take weeks or months
• Cost: bridge loans carry higher interest rates and fees, making them more expensive over time
• Loan term: bridge loans typically run for 6-12 months, while traditional loans can extend over several years
• Collateral: bridge loans almost always require secured assets like property or equipment, whereas some traditional loans may be unsecured
• Repayment: bridge loans are usually repaid in a lump sum at the end of the term, while traditional loans use regular scheduled payments
• Borrowing limits: bridge loans may allow higher amounts because they're secured against specific assets

A bridge loan works best when you need funds quickly for a short period and have a clear plan to repay. Traditional financing is better suited to longer-term needs where a lower interest rate matters more than speed. For more on your options, read this guide to financing your business.

Pros and cons of bridge loans

Bridge loans offer clear advantages when used for the right situation, but they also carry risks worth considering before you apply.

Advantages of bridge loans include:

• Speed: arrange funding in less than a week compared to months for traditional loans
• Higher borrowing limits: access more capital than credit cards or lines of credit because the loan is secured
• Flexible structure: choose between open or closed terms, fixed or variable rates, and different repayment options
• No monthly repayments: most bridge loans use rolled-up interest, so you repay everything at the end

Disadvantages of bridge loans include:

• Higher interest costs: lenders often calculate interest monthly rather than annually, increasing total repayment amounts
• Additional fees: expect application fees, valuation fees, and potential early exit charges
• Collateral risk: you could lose your secured asset if permanent funding falls through and you can't repay
• Short repayment window: if your exit event is delayed, you may face pressure to repay before you're ready

Alternatives to bridge loans

A bridge loan isn't the only way to access short-term funding. Depending on your situation, one of these alternatives may be a better fit for your business.

• Invoice financing: borrow against your unpaid invoices to access cash sooner, which suits businesses with reliable customers and regular invoicing cycles
• Business line of credit: draw funds as needed up to an approved limit and only pay interest on what you use, which offers ongoing flexibility for managing cash flow
• Overdraft: arrange an overdraft facility with your bank to cover short-term shortfalls, though limits tend to be lower than other financing options
• Equity loan: borrow against the equity in a property you already own, which typically offers lower interest rates than a bridge loan but takes longer to arrange

Each option has different costs, approval timelines, and eligibility requirements. Talk to your bank or financial adviser to work out which suits your needs best.

How to get a bridge loan

To get a bridge loan, you need to prepare thoroughly, gather the right documents, and create a clear repayment plan. Before you apply, work through these steps:

1. Calculate how long you'll need the funds.
2. Define exactly how you'll use the money.
3. Document your exit plan showing how you'll repay.

You'll also need to meet the lender's criteria. Most lenders require:

• a decent credit history showing you're reliable with debt repayments
• collateral such as property, inventory, or equipment to secure the loan
• proof of repayment ability showing you can service the loan until your exit event
• a clear exit plan with evidence of incoming funds from a sale, customer payment, or permanent financing

Talk to your bank

Talk to your bank first if you need a bridge loan. You've already built a relationship, and your bank knows your business best. Not all banks offer bridge loans, so you may need to work with specialist providers. Make sure any lender you approach is reputable.

Your accountant can advise you and help prepare the financial documents for your application. Having organised records makes the process faster and improves your chances of approval.

Manage your bridge loan finances with Xero

Accurate financial records make applying for a bridge loan smoother and help you manage repayments confidently. Keeping your books organised means you can share financial reports with lenders without scrambling to pull documents together.

Small business accounting software like Xero keeps your finances ready to share when lenders need them. Track your cash flow, run reports, and stay on top of your loan repayments in one place. Get one month free.

FAQs on bridge loans

Here are answers to common questions about bridge loans for small businesses.

What is the difference between a bridge loan and bridging finance?

Bridging finance is the umbrella term for short-term funding solutions that bridge a gap between transactions. A bridge loan is one specific type of bridging finance that provides cash through a loan structure until you secure permanent financing or receive expected payments.

How does a bridge loan work?

You apply with proof of collateral, credit history, and an exit plan. Once approved, funds are released quickly. You repay the borrowed amount plus accrued interest when your exit event occurs, such as selling a property or receiving permanent financing.

How much deposit do you need for a bridge loan?

Deposit requirements vary by lender, but you'll typically need to cover 20-40% of the asset's value with your own funds or existing equity. Business bridge loans may have different requirements from property bridge loans.

What are the disadvantages of a bridge loan?

Bridge loans carry higher interest rates than traditional financing, often calculated monthly rather than annually. You'll also face setup fees and potential exit fees. The biggest risk is losing your collateral if your permanent funding falls through and you can't repay.

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

Bridge loans are designed for speed. Some lenders can approve and fund bridge loans in less than a week, compared to several months for traditional business loans.

Can you use a bridge loan for a business purchase?

Yes, bridge loans can fund business purchases, property acquisitions, equipment buys, and other time-sensitive investments. You'll need to demonstrate how you plan to repay the loan, typically through a future sale, revenue, or permanent financing.