Bridge loan: what it is and how it works in business

Published Thursday 26 February 2026

Table of contents

• A bridge loan is a type of bridging finance
• How bridge loans work
• When you might need a bridge loan
• Types of bridge loans
• How much do bridge loans cost?
• How long does it take to get a bridge loan?
• Bridge loans: for and against
• How to get a bridge loan
• Managing bridge loans alongside your business finances
• FAQs on bridge loans

Key takeaways

• Prepare a clear exit strategy before applying for a bridge loan, showing exactly how you'll repay the funds through permanent financing, asset sales, or incoming payments within the loan term.
• Budget for total costs of 8-10% of the loan amount, including monthly interest rates of 0.5-1.5%, arrangement fees of 1-2%, and additional valuation and legal costs.
• Secure your bridge loan against valuable assets like property or equipment, as lenders require collateral to offset the higher risk of short-term lending.
• Act quickly when opportunities arise, as bridge loans can complete in 3-14 days compared to months for traditional financing, making them ideal for time-sensitive business needs.

A bridge loan is a type of bridging finance

Bridging finance is the umbrella term for short-term funding that "bridges a gap." You may also hear it called gap financing or swing loans.

A bridge loan (sometimes called debt bridge financing) is one type of bridging finance. It provides cash until you arrange longer-term borrowing. The other main types, equity bridge financing and IPO bridge financing, are typically used by larger companies rather than small businesses.

How bridge loans work

A bridge loan provides you with quick funds to cover a financial gap until a more permanent source of money arrives. This could be the sale of a property, a long-term business loan, or a large payment from a client.

Because they are short-term, lenders need security. This means bridge loans are almost always secured against a valuable asset, like business property or inventory. This asset acts as collateral, which the lender can claim if you're unable to repay the loan. You'll need a clear 'exit strategy', a plan for how you'll pay back the loan, which is usually the arrival of your expected long-term funding.

When you might need a bridge loan

Bridge loans help businesses in several situations:

• Seizing time-sensitive opportunities: Act fast on property deals, equipment purchases, or expansion plans
• Maintaining operations: Cover payroll, rent, and supplier payments during cash flow gaps
• Managing timing mismatches: Bridge the period between selling one asset and buying another

Bridge loans can address many specific business needs.

Examples of bridge loan uses

Use a bridge loan to:

• cover operating costs such as payroll, utilities, rent, and inventory while waiting for long-term financing
• manage cash flow gaps caused by seasonal fluctuations, large capital expenses, or delayed customer payments. Clients on net-60 or net-90-day terms can delay payment for up to three months.
• bridge insurance delays by covering expenses while waiting for a claim to pay out
• act on time-sensitive opportunities such as property deals, equipment purchases, or product launches

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

Types of bridge loans

Bridge loans come in several forms. Understanding the differences helps you choose the right option for your situation.

Open vs closed bridge loans

Closed bridge loans have a fixed repayment date, such as when your permanent financing is approved or a property sale completes. Lenders prefer closed loans because they know exactly how you'll repay. This typically means easier approval and lower interest rates.

Open bridge loans have no fixed repayment date, giving you more flexibility. However, you'll still need to repay within the loan term (usually 12 months). Open loans often carry higher interest rates because they present more risk to lenders.

The type of charge also affects your bridge loan terms and costs.

First charge vs second charge bridge loans

First charge bridge loans are secured against a property with no existing mortgage. The lender has first claim on the asset if you default. These typically offer lower interest rates.

Second charge bridge loans are secured against a property that already has a mortgage. The bridge loan lender sits behind the existing mortgage provider in the queue for repayment. This increased risk usually means higher interest rates and stricter criteria.

How much do bridge loans cost?

Bridge loan costs are higher than traditional business loans because of the short-term nature and increased lender risk. Understanding the full cost helps you budget accurately.

Interest rates and fees

Bridge loan interest rates in the UK typically range from 0.5% to 1.5% per month. Lenders often quote monthly rates rather than annual percentage rates (APR), so a 1% monthly rate equals roughly 12% annually before compounding.

Expect these additional costs:

• Arrangement fee: 1% to 2% of the loan amount
• Valuation fee: £500 to £1,500 depending on property value
• Legal fees: Both your solicitor's fees and the lender's legal costs
• Exit fee: Some lenders charge 1% to 2% when you repay

Here's how these costs add up in practice.

Example cost calculation

For a £200,000 bridge loan over six months at 1% monthly interest:

• Interest cost: £200,000 × 1% × 6 months = £12,000
• Arrangement fee (1.5%): £3,000
• Valuation and legal fees: approximately £2,500
• Total cost: around £17,500

Bridge loans work best for short-term needs where the cost is outweighed by the opportunity or urgency.

How long does it take to get a bridge loan?

Bridge loans can complete in as little as three to 14 days, compared to several weeks or months for traditional business loans. Speed is one of their main advantages.

Several factors affect the timeline:

• Property valuation: If your collateral needs a formal valuation, this can add a few days
• Legal work: Straightforward cases complete faster; complex ownership structures take longer
• Documentation readiness: Having your financial records and exit plan prepared speeds up approval
• Lender type: Specialist bridge lenders often move faster than traditional banks

For urgent situations, some lenders offer expedited processing within 48 to 72 hours, though this may come with higher fees.

Bridge loans: for and against

Bridge loans offer clear advantages when used sensibly:

• Speed: Arrange funding in days rather than weeks. Some lenders complete within a week.
• Higher borrowing limits: Borrow more than credit cards or lines of credit allow because the loan is secured.
• Flexible terms: Choose from open or closed terms, fixed or variable rates, and interest-only or capitalised payment structures.

However, bridge loans also carry risks:

• High interest rates: Lenders often calculate interest monthly rather than annually, which can push costs higher.
• Additional fees: Expect arrangement fees, valuation fees, and potentially early exit fees.
• Collateral risk: You could lose your secured asset if permanent funding falls through and you can't repay.

How to get a bridge loan

Applying for a bridge loan involves preparing your documentation and demonstrating a clear repayment plan. Follow these steps:

1. Determine your timeline and exit strategy: Work out how long you need the funds and exactly how you'll repay, whether through permanent financing, asset sale, or incoming payments.
2. Gather required documents: Prepare your credit history, proof of collateral (property, equipment, or inventory), and evidence you can make repayments.
3. Compare lenders: Research banks and specialist bridge loan providers to find competitive rates and terms.
4. Submit your application: Provide your documentation along with a clear exit plan showing how you'll repay the loan.
5. Review terms carefully: Check interest rates, fees, and repayment conditions before signing.

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

Once you've prepared your application, you'll need to find the right lender.

Talk to your bank

Start by talking to your bank. You've already built a relationship, and they know your business. Not all banks offer bridge loans, though, so you may need to approach specialist providers. Always check that any lender is reputable before proceeding.

Your accountant can help you prepare the financial information lenders require. Using small business accounting software keeps your records organised and makes pulling together application documents faster.

Managing bridge loans alongside your business finances

Taking on short-term debt requires clear visibility of your cash flow. You need to track when repayments are due, monitor incoming funds, and ensure you can meet your exit strategy deadline.

Xero's accounting software helps you manage bridge loan repayments alongside your regular business finances. You can track cash flow in real time, set up payment reminders, and share accurate financial reports with your accountant or lender.

Get one month free to see how Xero simplifies your business finances.

FAQs on bridge loans

Here are answers to common questions about bridge loans.

How much deposit or equity do you need for a bridge loan?

Most lenders require 20% to 40% equity in your property or collateral. The exact amount depends on the lender, the property type, and your overall financial position.

What happens if you can't repay a bridge loan on time?

If you can't repay, the lender may charge penalty interest or take possession of your collateral. Communicate with your lender early if you anticipate problems, as some may agree to extend the term.

Can you extend a bridge loan if you need more time?

Some lenders allow extensions, typically for an additional fee and higher interest rate. Check whether extension options are available before signing your original agreement.

Can you get a bridge loan with poor credit?

Yes, though options are more limited and interest rates higher. Lenders focus heavily on your exit strategy and collateral value, so a strong repayment plan can offset credit concerns.

Are bridge loans only for property purchases?

No. While property transactions are the most common use, businesses also use bridge loans for equipment purchases, stock acquisition, cash flow gaps, and seizing time-sensitive opportunities.