What Is a Bridge Loan?
A bridge loan is a short-term loan used until a person or company secures permanent financing or removes an existing obligation. It allows the user to meet current obligations by providing immediate cash flow. Bridge loans are short term, up to one year, have relatively high interest rates and are usually backed by some form of collateral, such as real estate or inventory.
How a Bridge Loan Works
Bridge loans, also known as interim financing, gap financing or swing loans, bridge the gap during times when financing is needed but not yet available.
Both corporations and individuals use bridge loans, and lenders can customize these loans for many different situations.
[Important: Bridge loans provide immediate cash flow, but come with high interest rates and usually require collateral.]
Bridge Loans vs. Traditional Loans
Bridge loans typically have a faster application, approval and funding process than traditional loans. However, in exchange for the convenience, these loans tend to have relatively short terms, high interest rates and large origination fees.
Generally, borrowers accept these terms because they require fast, convenient access to funds. They are willing to pay high interest rates because they know the loan is short term and plan to pay it off with low-interest, long-term financing quickly.
Additionally, most bridge loans do not have repayment penalties.