A bridge loan is a short-term loan used to provide immediate cash flow until a person or business secures permanent financing or pays off an existing obligation. It typically lasts from a few weeks up to 1-3 years, depending on the situation
. Bridge loans are commonly used in real estate to "bridge the gap" between buying a new home and selling the current one. For example, homeowners can use the equity in their existing home to finance the down payment on a new property while waiting for their current home to sell
. Businesses may also use bridge loans to cover expenses temporarily while waiting for long-term financing or funding rounds to close
. Key characteristics of bridge loans include:
- Higher interest rates than conventional loans, often about 2% above prime rate, reflecting the higher risk
- Secured by collateral such as real estate or business inventory
- Typically arranged quickly with less documentation than traditional loans
- Loan amounts often capped around 80% of the value of the collateral property
- Terms usually range from 6 months to 1 year, though can be shorter or longer depending on lender and purpose
Bridge loans provide flexibility and quick access to funds during transitional periods but come with higher costs and risks, such as having to make payments on two properties simultaneously in real estate cases
. In summary, a bridge loan is a temporary financing tool designed to "bridge" the financial gap until permanent funding is secured or an existing obligation is resolved
