Bridge loan: how it works, costs, and when to use it

Published Wednesday 1 April 2026

Table of contents

• What is a bridge loan?
• Why use a bridge loan?
• How bridge loans work
• Features of bridge loans
• Bridge loan costs and rates
• Bridge loans: for and against
• Bridge loans vs other financing options
• How to get a bridge loan
• Manage your bridge loan with confidence
• FAQs on bridge loans

Key takeaways

• Use bridge loans only when you have a clear exit strategy and can secure the loan with valuable collateral, as these short-term loans typically require repayment within 12 months and carry higher interest rates than traditional financing.
• Apply for bridge loans when you need funds within days rather than weeks, such as seizing time-sensitive business opportunities or covering cash flow gaps while waiting for customer payments or long-term financing approval.
• Start your bridge loan application with your existing bank first, as they already know your business and can often provide faster approval than unfamiliar lenders.
• Calculate the total cost including arrangement fees, exit fees, and higher interest rates before committing, as bridge loans cost significantly more than traditional financing due to their short terms and higher lender risk.

What is a bridge loan?

Bridging finance is the umbrella term for short-term funding that bridges a financial gap. It's also known as 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 of bridging finance, equity bridge financing and initial public offering (IPO) bridge financing, are typically not used by small businesses.

Why use a bridge loan?

Bridge loans help businesses access quick funds when they can't wait for traditional financing approval. They're ideal for responding to time-sensitive opportunities or covering expenses while waiting for expected payments.

Common reasons businesses use bridge loans include:

• Seizing opportunities: Acting fast on property deals, acquisitions, or inventory purchases
• Managing cash flow gaps: Covering expenses while waiting for customer payments or funding rounds
• Maintaining operations: Keeping up with payroll, rent, and supplier payments during slow periods

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 fluctuations: Bridge cash flow gaps during slow periods
• Handle payment delays: Cover costs when customer payments or insurance claims are pending
• Recover from large expenses: Maintain operations after significant capital outlays
• Act on time-sensitive opportunities: Launch new products or purchase property before competitors

Example: You own a successful restaurant and spot an opportunity to buy another in a high-traffic area. The seller wants to close quickly, but your long-term financing won't be approved for several months. A bridge loan lets you secure the purchase now and repay it once your permanent financing comes through.

How bridge loans work

A bridge loan provides immediate funds while you wait for longer-term financing or expected payments to arrive. The process is a key advantage, with bridge loans often closing in 2–4 weeks, compared to 60–90 days for permanent financing.

Here's how it works:

1. Identify your need and exit strategy: Determine how much you need, what you'll use it for, and how you'll repay (for example, through incoming financing or a property sale)
2. Apply with financial documentation: Submit business financials, details of your collateral, and proof of your exit strategy
3. Lender evaluates your application: The lender assesses your collateral value, creditworthiness, and repayment plan
4. Receive funding: Once approved, funds are typically available within days to a few weeks
5. Repay upon exit event: Pay off the loan when your permanent financing arrives or your expected payment comes through

The loan bridges the gap between your immediate need and the arrival of your long-term funding solution.

Features of bridge loans

Bridge loans have several key characteristics:

• Short-term: Typically 12 months or less, as bridge loans generally have maturities of one year or less.
• Rapid approval: Faster than traditional loans, with some lenders funding within days
• High interest rates: Lenders charge more due to higher risk and shorter profit window
• Collateral required: Secured by assets like property, equipment, or inventory. The loan-to-value ratio typically ranges from 65% to 80% of the asset's appraised value.
• Flexible repayment options: Available with closed or open terms

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

Open loans have no fixed exit strategy but must still be repaid within the term. They carry higher rates due to increased lender risk.

Bridge loan costs and rates

Bridge loans cost more than traditional financing due to their short terms and higher lender risk. Understanding the full cost helps you decide if a bridge loan makes financial sense.

Key cost components include:

• Interest rates: Typically higher than term loans, often calculated monthly rather than annually
• Arrangement fees: Charged upfront to set up the loan. Origination fees range from 1% to 3% of the loan amount.
• Exit fees: Some lenders charge penalties for early repayment
• Valuation fees: Costs for assessing collateral value

Lenders charge more because they have less time to earn returns and face greater risk if your exit strategy falls through. The convenience and speed of bridge financing comes at a premium.

Rates vary based on:

• loan amount and term length
• collateral type and value
• your credit history and business financials
• whether the loan has a closed or open repayment structure

Always compare total costs, including fees, before committing to a bridge loan.

Bridge loans: for and against

Bridge loans offer several advantages when used wisely:

• Speed: Approval and funding can happen in less than a week
• Higher borrowing limits: Secured loans allow larger amounts than credit cards or lines of credit
• Flexible terms: Choose from open or closed terms, fixed or variable rates, and interest-only or capitalised payments

However, bridge loans also carry risks:

• High interest rates: Some lenders calculate interest monthly, which increases total repayment costs
• Additional fees: Setup fees and early exit penalties may apply
• Collateral risk: You could lose your secured assets if you can't repay the loan

Bridge loans vs other financing options

A bridge loan isn't always the best choice. Compare it with alternatives to find the right fit for your situation.

• Line of credit: Offers ongoing access to funds up to a set limit. Lower rates than bridge loans but slower approval. Better for recurring cash flow needs rather than one-time opportunities.
• Term loan: Provides a lump sum with fixed repayments over months or years. Lower rates and longer terms, but approval takes weeks. Better for planned expenses when you have time to wait.
• Business credit card: Fast access to funds with no collateral required. Lower limits and high interest if not paid quickly. Better for smaller, short-term expenses.
• Invoice financing: Advances cash against unpaid invoices. Useful if you're waiting on customer payments but doesn't help with other cash flow gaps.

A bridge loan is often the right choice when:

• you need funds within days, not weeks
• you have a clear exit strategy (pending sale, approved financing, expected payment)
• you have collateral to secure the loan
• you need more than your credit limit allows

How to get a bridge loan

To get a bridge loan, you'll need to prepare documentation and meet lender requirements. Before applying, clarify how long you need the funds, what you'll use them for, and how you'll repay.

Most lenders require:

• Credit history: A track record of responsible borrowing is required, and while lenders are flexible, most expect a minimum personal credit score of 600 to 650.
• Collateral: Assets like property, equipment, or inventory to secure the loan
• Repayment proof: Evidence you can make payments, such as financial statements
• Exit plan: Documentation of expected funds, like a pending sale or approved long-term financing

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

When you're ready to apply, start with your bank first.

Start with your bank. You already have a relationship, and your bank knows your business. If your bank doesn't offer bridge loans, look for specialised lenders with strong reputations.

Involve your accountant. They can advise on whether a bridge loan suits your situation and help prepare the financial documentation lenders require.

Use accounting software to simplify the process.Xero accounting software makes it easier to generate the financial reports and records lenders need to assess your application.

Manage your bridge loan with confidence

Bridge loans can help when you need fast access to capital and have a clear repayment plan. They help you act on time-sensitive opportunities, manage cash flow gaps, and keep your business running while waiting for longer-term funding.

However, they're not right for every situation. The higher costs and collateral requirements mean you should only use a bridge loan when you have a solid exit strategy and can afford the interest.

Good financial records make the process easier. Lenders want to see clear financials, accurate cash flow projections, and documentation of your exit strategy. Accounting software helps you maintain these records and generate the reports lenders need.

Whether you're exploring bridge loan options or managing other aspects of your business finances, Xero's accounting software gives you up-to-date financial information and organised records. Get one month free when you sign up today.

FAQs on bridge loans

Common questions about bridge loans for small businesses.

Is a bridge loan right for my business?

A bridge loan may be right for you if you have a time-sensitive opportunity and a clear exit strategy. You'll also need adequate collateral and the ability to afford higher interest rates. It's not a good fit if you lack a repayment plan or can't risk losing your collateral.

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

The lender may extend your term with additional fees, demand immediate repayment, or seize your collateral. Contact your lender early if you expect repayment issues, as some may offer extensions or restructuring options.

Can I get a bridge loan with a low credit score?

It's possible but more difficult. You'll likely need stronger collateral, and you should expect higher interest rates. Some specialised lenders work with borrowers who have lower credit scores, focusing more on collateral value and exit strategy.

How is a bridge loan different from a line of credit?

A bridge loan provides a one-time lump sum for a specific purpose with a set repayment date. A line of credit offers ongoing access to funds up to a limit, with lower rates but typically slower approval. Bridge loans suit one-time opportunities; lines of credit suit recurring needs.

Can I pay off a bridge loan early without penalty?

It depends on your loan terms. Some lenders charge early repayment fees, while others allow prepayment without penalty. Review your loan agreement carefully and ask about exit fees before signing.