Bridge loan explained: how it works, costs and uses

Published Monday 30 March 2026

Table of contents

• A bridge loan is a type of bridging finance
• How bridge loans work
• Why use a bridge loan?
• Features of bridge loans
• How much do bridge loans cost?
• Bridge loans: for and against
• How to get a bridge loan
• Manage bridge loans and business finances with confidence
• FAQs on bridge loans

Key takeaways

• Apply for bridge loans when you need quick funding to fill temporary gaps, as they can provide approval within 5-15 business days compared to months for traditional financing.
• Prepare strong collateral and a clear exit plan before applying, since bridge loans are secured by assets like property or equipment and lenders require proof of how you'll repay the loan.
• Budget for higher costs including interest rates around 10.4% annually plus origination fees of 1-3% of the loan amount, but weigh these against the value of time-sensitive opportunities.
• Start with your existing bank when seeking bridge financing, as they already know your business and can process applications faster than unfamiliar lenders.

A bridge loan is a type of bridging finance

Bridging finance is the umbrella term for short-term funding that bridges a gap between immediate needs and future funds. You may also hear it called gap financing or swing loans.

A bridge loan (or debt bridge financing) is one type of bridging finance. It provides quick cash until you secure longer-term borrowing. The other main types, equity bridge financing and IPO bridge financing, are typically not used by small businesses.

How bridge loans work

A bridge loan provides short-term funds while you wait for permanent financing or incoming payments. Here's how the process typically works:

1. Apply with your lender: Submit your application along with financial documents, details about your collateral, and your exit plan.
2. Receive approval: Lenders review your creditworthiness and collateral value, often approving bridge loans faster than traditional financing; many can close in five to 15 business days, according to this bridge loan guide, with some funding in as little as three to five days.
3. Access funds: Once approved, you receive the loan amount, typically within days.
4. Make payments: Pay interest (and sometimes principal) during the loan term, which is typically six to 24 months (source), though some lenders offer terms up to 36 months.
5. Repay the loan: When your permanent financing arrives or your expected payment comes through, repay the bridge loan in full.

Bridge loans are secured by collateral, which means the lender can claim your assets if you default. This collateral requirement is what allows faster approval and higher borrowing limits, with lenders often letting you borrow up to 80% of an asset's value, according to Lendio.

Why use a bridge loan?

Businesses use bridge loans when they need quick funds to fill a temporary gap. This typically happens while waiting for permanent financing approval or expected customer payments.

Bridge loans help you respond to opportunities quickly and keep operations running. They're especially useful when you need to honour supplier debts or cover expenses while longer-term funding is in progress.

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
• manage seasonal cash flow: smooth out revenue fluctuations during slow periods
• bridge payment delays: maintain operations when customer payments or insurance claims are delayed
• recover from large expenses: stabilise cash flow after significant capital investments
• act on time-sensitive opportunities: launch a product line or purchase property before a deal expires

For example, say you own a restaurant and spot an opportunity to buy a second location. The seller wants to close quickly, but your long-term financing will take months to approve. A bridge loan lets you secure the property now and repay it once your permanent funding comes through.

Features of bridge loans

Bridge loans share several key characteristics:

• Short-term: typically 12 months or less
• Rapid approval: faster funding than traditional loans, often within days
• Higher interest rates: lenders charge more because bridge loans carry higher risk and shorter profit windows
• Collateral required: secured by assets such as property, equipment, or inventory
• Flexible repayment terms: available as closed or open loans

Closed loans have a specific repayment date tied to an event, such as receiving permanent financing or completing a project. They're easier to obtain and typically have lower interest rates.

Open loans have no fixed exit strategy but must still be repaid within the loan term.

How much do bridge loans cost?

Bridge loans cost more than traditional financing because they're short-term and carry higher risk for lenders. Here's what to expect:

• Interest rates: Interest rates can range widely, with the national average bridge loan rate at approximately 10.4% in late 2025, according to Clearhouse Lending, though some lenders charge monthly rates of 1% to 2%.
• Origination fees: usually 1% to 3% of the loan amount, charged upfront
• Exit fees: some lenders charge a fee when you repay early or at the end of the term
• Valuation fees: If property secures the loan, expect to pay for an appraisal

Example cost breakdown: A $100,000 bridge loan at 10% annual interest with a 2% origination fee would cost roughly $2,000 upfront plus $833 per month in interest.

Compare these costs against the opportunity you're pursuing. If a bridge loan lets you secure a deal worth significantly more than the financing costs, it may be worth the premium.

Bridge loans: for and against

When used sensibly, bridge loans offer several advantages:

• Speed: Funding can happen in less than a week, much faster than traditional loans
• Higher borrowing limits: Secured loans let you borrow more than credit cards or lines of credit
• Flexible structure: Choose between open or closed terms, fixed or variable rates, and interest-only or capitalised payments

Bridge loans also have disadvantages:

• High interest rates: Some lenders calculate interest monthly rather than annually, which can significantly increase costs
• Additional fees: Expect origination fees and potential early exit charges
• Collateral risk: If your permanent funding falls through, you could lose the assets securing the loan

How to get a bridge loan

To get a bridge loan, start by determining how long you need the funds, what you'll use them for, and how you'll repay.

You'll also need to meet lender requirements. Most lenders ask for:

• Decent credit history: While more flexible than other loans, most lenders require a minimum FICO score of 650 to 680, according to Clearhouse Lending, to demonstrate your ability to manage debt responsibly
• Collateral: assets such as inventory, equipment, or property to secure the loan
• Proof of repayment ability: evidence you can cover the loan payments
• Exit plan: documentation showing how you'll repay, such as incoming customer payments or approved permanent financing

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

Talk to your bank

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

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

Your accountant can help you prepare the financial documents lenders require. Using small business accounting software like Xero makes it easier to pull together accurate records quickly.

Manage bridge loans and business finances with confidence

Whether you're considering a bridge loan or planning for long-term growth, clear visibility into your finances helps you make confident decisions. Knowing your cash flow position, upcoming expenses, and repayment capacity is essential before taking on short-term debt.

Xero accounting software gives you real-time insights into cash flow, expenses, and financial health, so you're always prepared for your next move. Get one month free and take control of your business finances today.

FAQs on bridge loans

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

How long does bridge loan approval typically take?

Bridge loan approval often takes just a few days to two weeks, much faster than traditional business loans which can take several weeks or months.

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

If you can't repay on time, the lender may seize your collateral, charge penalty fees, or offer bridge loan extensions for a fee (often at a higher interest rate). Learn more in this complete guide to bridge loans.

Can I get a bridge loan with a less-than-perfect credit score?

Some lenders approve bridge loans for borrowers with lower credit scores if they have strong collateral and a clear exit plan, though you'll likely pay higher interest rates.

What's the difference between a bridge loan and a business line of credit?

A bridge loan is a lump sum repaid at a specific time, while a line of credit lets you draw funds as needed and only pay interest on what you use.

Are bridge loan costs tax-deductible for my business?

Interest paid on bridge loans used for business purposes is generally tax-deductible, but check with your accountant to confirm based on your specific situation.