Financial Glossary
Bridge loan
A bridge loan is short-term financing, typically 6 to 24 months, designed to provide immediate liquidity while a borrower arranges permanent or longer-term financing. In real estate, bridge loans are commonly used to fund an acquisition or renovation before a property stabilizes and qualifies for conventional long-term financing. In corporate finance, bridge loans may cover operating needs during a fundraising process, fund a gap between the sale of one asset and the closing of a replacement asset, or provide working capital while a longer-term credit facility is being arranged. Bridge loans carry higher interest rates than conventional loans, often with origination fees and prepayment flexibility, reflecting their short duration and the higher execution risk borne by the lender.
Problem & Application
A campground owner wants to acquire an adjacent parcel to expand site capacity, but the acquisition must close before the existing property's refinancing completes in four months. A bridge lender provides $500,000 for 90 days at an annualized rate of 12% plus a 2% origination fee. Total cost of the bridge is roughly $15,000 in interest (12% times $500,000 times 90 divided by 365) plus $10,000 in origination fees, or $25,000. When the refinancing closes, the bridge is repaid. The operator must weigh this $25,000 cost against the economic benefit of securing the parcel and expanding future capacity. If missing the acquisition would mean paying a higher price later, or losing the parcel entirely, the bridge cost may be well justified. Operators should confirm the exit strategy before drawing on a bridge, since a failed refinancing or sale leaves the borrower exposed to higher costs or forced liquidation.
In Short
Bridge loans are valuable for bridging funding gaps, but they require careful consideration due to their cost and risk.