Bridge Loan

A bridge loan is a short-term loan that provides immediate funding to cover a gap between a current financial need and a longer-term financing solution. The most common use is in real estate: you need to buy a new property before selling your existing one, and a bridge loan gives you the cash to do it. Bridge loans typically run six months to three years, carry higher interest rates than conventional loans, and require collateral. They are also called swing loans, gap financing, and interim financing.

Think of a bridge loan like the temporary walkway contractors build over a construction pit: it gets you where you need to go while the permanent path is still being built.

Real Estate Is the Primary Use Case

In residential real estate, a bridge loan lets you use the equity in your current home as a down payment on a new one before your existing home sells. You can make a clean, contingency-free offer on the new property rather than submitting one conditioned on a sale that has not happened yet. In a competitive market, that distinction determines whether your offer gets accepted.

In commercial real estate, developers use bridge loans to secure properties quickly when timing does not allow for the months-long underwriting process of arranging permanent mortgage financing. Bridge loans can close within 72 hours, making them the only viable tool when a deal carries a tight deadline.

Interest Rates and Qualification Requirements Reflect the Added Risk

Bridge loans carry higher interest rates than conventional financing because the lender takes on short-term risk without the extended underwriting process that characterizes traditional mortgages. Most lenders require a credit score of at least 700. Loan-to-value ratios are typically capped at 80% of the combined value of both properties in a home purchase scenario.

Most bridge loans come from specialized private lenders rather than traditional banks or credit unions. That distinction matters because private lenders operate with fewer consumer protections and regulatory constraints than banks. Review all terms carefully before signing.

Businesses Also Use Bridge Loans During Operational Transitions

Companies use bridge loans to fund operations during acquisitions, to maintain cash flow while waiting for a long-term credit facility to close, and to cover working capital gaps during periods of growth. In venture capital, bridge loans appear between funding rounds. When a company is raising its next equity round but needs capital immediately to continue operating, a bridge loan provides the runway. These loans often convert into equity at the next round's terms.

Carrying Two Debt Obligations Is the Primary Risk

If you use a bridge loan to buy a new home and your existing property does not sell quickly, you end up paying the bridge loan plus two mortgages simultaneously. That three-payment burden can strain cash flow severely. Use a bridge loan only when you have strong confidence in your ability to repay it quickly, and only when the cost of the higher rate is justified by the benefit of moving fast.

Sources:
https://en.wikipedia.org/wiki/Bridge_loan
https://www.bankrate.com/mortgages/bridge-loan/
https://corporatefinanceinstitute.com/resources/commercial-lending/what-is-bridge-loan/
https://www.chase.com/personal/mortgage/education/financing-a-home/what-is-a-bridge-loan
https://www.rocketmortgage.com/learn/bridge-loan