What Is a Bridge Loan and How Does It Work?

Published Thursday 19 March 2026

Table of contents

• How bridge loans work
• Why use a bridge loan?
• Types of bridge loans
• How much does a bridge loan cost?
• What to expect with a bridge loan
• Bridge loans: for and against
• How to get a bridge loan
• Managing your business finances with bridge loans
• Get one month free
• FAQs on bridge loans

Key takeaways

• Apply for bridge loans when you need quick funding for time-sensitive opportunities, as lenders can approve and fund these loans in days or weeks compared to months for traditional financing.
• Prepare a clear exit plan showing exactly how you'll repay the loan, whether through property sales, permanent financing, or confirmed customer payments, as this significantly improves your approval chances.
• Budget for higher costs including interest rates that are often calculated monthly rather than annually, plus application fees, valuation fees, and potential exit fees that make bridge loans more expensive than traditional financing.
• Secure the loan with collateral like property, inventory, or equipment, and expect to provide 20-40% of the asset's value as a deposit or existing equity to meet most lenders' requirements.

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.

Bridging finance is the umbrella term for short-term funding that bridges a gap. A bridge loan is one 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. Regarding supplier finance arrangements, new disclosures apply for financial years starting on or after 1 January 2024 to increase transparency.

Examples of bridge loan uses

Use a bridge loan to:

• cover operating costs: pay for payroll, utilities, rent, and inventory while waiting for long-term financing
• manage seasonal gaps: smooth out cash flow fluctuations during slower periods
• bridge payment delays: cover expenses when customer payments are late or after a large capital expense
• wait for insurance payouts: keep the business running while a claim is processed
• act on opportunities: move quickly on 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 an area with excellent demographics. You're ready to expand, but traditional financing will take months to approve. 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?

Understanding the full cost of a bridge loan helps you evaluate whether it's the right financing option for your business. Bridge loans typically cost more than traditional financing, but the speed and flexibility can justify the expense for the right situation.

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

Deposit requirements

You'll usually need to cover 20–40% of the asset's value with your own funds or existing equity. Requirements vary by lender and situation, so discuss your specific circumstances when you apply.

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.

What to expect with a bridge loan

Bridge loans have distinct characteristics that set them apart from traditional business financing. Here's what to expect:

• Short-term commitment: most bridge loans run for 12 months or less
• Fast approval: lenders can approve and fund bridge loans in days or weeks rather than months
• Higher interest rates: lenders charge more because bridge loans carry higher risk and shorter profit windows
• Collateral required: you'll need to secure the loan against property, inventory, or equipment
• Flexible repayment: you can structure repayment around your exit event rather than fixed monthly payments

Bridge loans: for and against

Bridge loans offer several advantages when used sensibly:

• 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

Bridge loans also carry disadvantages to consider:

• Higher interest costs: lenders often calculate interest monthly rather than annually, increasing total repayment amounts
• Additional fees: expect application fees and potential early exit charges
• 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 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:

• decent credit history: demonstrating you're reliable with debt repayments
• collateral: property, inventory, or equipment to secure the loan
• proof of repayment ability: showing you can service the loan until your exit event
• clear exit plan: 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 applying faster. Small business accounting software like Xero keeps your finances ready to share when lenders need them.

Managing your business finances with bridge loans

Bridge loans can provide the quick funding you need to seize time-sensitive opportunities or manage cash flow gaps in your business. By understanding how they work, what they cost, and the risks involved, you can decide whether short-term financing is right for your situation.

Accurate financial records make applying for a bridge loan smoother and help you manage repayments confidently. Keeping your books organised means you can share what lenders need without scrambling to pull documents together. Get one month of Xero free.

FAQs on bridge loans

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

What's the difference between a bridge loan and bridging finance?

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

How does a bridging loan work?

Bridge loans provide short-term funds secured against an asset like property or equipment. Most bridge loans use rolled-up interest, meaning you repay the borrowed amount plus accrued interest when your exit event occurs rather than making monthly payments.

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.

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 equity. Business bridge loans may have different requirements than property bridge loans.

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.