What it means
Bridge finance solves a timing problem rather than a solvency problem. The borrower is not short of value, only short of cash on a particular date, and the loan exists purely to span the weeks or months until the expected money lands.
Lenders price bridges for speed and risk rather than for the length of the loan. Interest rates well into double digits are normal, and there are usually arrangement fees at the start and exit fees on repayment, which is why the headline rate understates the true cost.
Because the loan is short, the lender's whole focus is on the exit, meaning the specific event that will repay it. A signed sale contract, a term sheet from a lead investor or a credit-approved refinancing offer all count as strong exits, whereas "we expect to raise next year" does not.
Security is nearly always required, typically a first charge over property or a debenture over the company's assets. Interest is often rolled up and paid at the end rather than monthly, which keeps cash outflows low during the term but means the balance owed grows as the loan runs.
The danger is a bridge that has nowhere to land. If the exit slips, extension fees and default interest turn an expensive short-term facility into a serious problem, so prudent borrowers stress test the timeline and agree an extension mechanism before signing rather than after the exit date has passed.
In practice
Real-world examples
Example 1
A dental group agrees to buy a competing practice with completion in eight weeks, while its bank term loan will take four months to document. It uses a $900,000 bridge to complete on time and repays it in full when the term loan draws down.
Example 2
A hardware start-up has a signed term sheet from a lead investor but the round will not close for three months, and payroll and a component order fall due first. Existing investors provide a convertible bridge that either repays at completion or converts into the new round at a discount.
Example 3
A property developer finishes a small scheme with two of six units sold and a construction loan maturing. A bridge repays the construction facility and gives twelve months to sell the remaining units at proper prices rather than accepting distressed offers.
Think of it
Imagine you are crossing a rushing river on stepping stones. Your long-term funding is the sturdy bridge being built further downriver. A bridge loan is the temporary plank you use right now to get across safely before the big bridge is finished.
Formula
Calculation
Total cost of a bridge loan = (Principal x Annual interest rate x Term in years) + Arrangement fee + Exit fee
A manufacturer has agreed to sell a surplus site for $3,500,000, with completion expected in about five months, and needs $2,000,000 now to pay for machinery for its new facility. It takes a six-month bridge at 11% a year, with a 1.5% arrangement fee and a 1% exit fee.
Interest = $2,000,000 x 11% x 0.5 years = $110,000. Arrangement fee = $2,000,000 x 1.5% = $30,000. Exit fee = $2,000,000 x 1% = $20,000.
Total cost = $110,000 + $30,000 + $20,000 = $160,000, which is 8% of the principal for six months, or roughly 16% on an annualised basis. The company judges that acceptable because the alternative was delaying the new facility by five months, which it valued at more than $400,000 of lost output.Case study
Seen in the real world
Ravensworth Logistics is a fictional haulage company presented here for illustrative purposes. It won a three-year contract that required 14 new vehicles costing $2,800,000, delivered before the contract start date, while its asset finance provider would only release funds once each vehicle was registered and on the road.
The company took a $2,000,000 six-month bridge at 11% with the fees described above, costing $160,000 in total. The vehicles arrived on time, the contract started on schedule, and the asset finance drew down over the following ten weeks and repaid the bridge four months early, which returned part of the interest under the facility's early repayment terms.
The finance director's note in this illustrative case was that the bridge was justified only because the exit was contractual rather than hoped for. Had the asset finance been merely likely rather than credit approved, the same facility would have carried real risk of an expensive extension.
Watch out
Common mistakes
- Comparing a bridge to a term loan on the headline interest rate alone. Arrangement and exit fees frequently add as much again to the cost, so only the all-in figure is meaningful.
- Taking a bridge without a defined, evidenced exit. Hoping the money turns up is how a short-term facility becomes a default, because extension fees and default rates escalate fast.
- Forgetting that rolled-up interest increases the amount owed. If interest is not paid monthly, the balance at redemption is larger than the sum borrowed and any loan-to-value test has to allow for it.
Questions
People also ask
How long does a bridge loan usually run?
Most sit between three and twelve months, and lenders price anything shorter than about three months with minimum interest periods that make very short bridges relatively costly.
Is a bridge loan a sign that a business is in trouble?
Not necessarily, because it is normally a timing tool used by otherwise sound businesses, though repeated bridging to cover operating shortfalls is a genuine warning signal.
Can a bridge be repaid early?
Usually yes, but check whether the facility carries a minimum interest period or early repayment charge, since some lenders charge a fixed number of months regardless of when you redeem.