Bridge loan

A bridge loan is short-term finance used to cover a funding gap until a defined future event releases the money to repay it. It is secured against an asset, priced above conventional term lending, and arranged quickly — typically for weeks or months rather than years. Also called bridging finance, a bridging loan, or interim financing.

The defining feature is not the tenor or the rate. It is that repayment depends on a specific identified event rather than on ongoing income. That single characteristic determines how bridge loans are underwritten, priced and lost.

Key characteristics

• Tenor: Weeks to 24 months; most commonly 3–12 months
• Security: Almost always secured, usually against property or another realisable asset
• Interest quotation: Quoted as a monthly rate rather than an annual rate
• Repayment during term: Often no monthly payments; interest retained or rolled up
• Repayment of principal: In a single lump sum at the end, from the exit event
• Speed of arrangement: Days to weeks, considerably faster than term lending
• Cost: Materially higher than a comparable term loan
• Underwriting focus: The exit, not the borrower's income

How a bridge loan works

A borrower needs funds now, and knows with reasonable confidence that a larger sum arrives later. The bridge covers the interval.

The classic case is a property chain. A buyer has found a property and must complete before their existing property has sold. A bridge loan secured against one or both properties funds the purchase; when the existing property sells, the sale proceeds repay the bridge in full. The borrower pays for speed and certainty, and accepts a high cost for a short period because the alternative is losing the purchase.

Business uses follow the same logic. A company awaiting a confirmed funding round, an insurance settlement, a tax refund, the completion of an asset sale, or the release of a longer-term facility may bridge the gap so that operations or a transaction can proceed on schedule.

The economics only make sense over a short window. A rate that is tolerable across three months becomes punitive across eighteen, which is why bridge lending punishes delay far more severely than term lending does.

The exit strategy

The exit is the event that repays the loan. It is the single most important element of a bridge transaction, and the thing that distinguishes bridge underwriting from every other kind.

Conventional lending asks: can this borrower service this debt from income? Bridge lending asks: will this specific event happen, on this timetable, and will it produce enough to clear the balance?

Common exits:

• Sale of the security property or another asset
• Refinance onto a term facility once the borrower or asset qualifies for it
• Receipt of a known sum — funding round, legal settlement, inheritance, grant disbursement, contract payment
• Completion of works that make an asset saleable or mortgageable

A credible exit is evidenced, not asserted. Lenders look for a signed sale agreement, a formal term sheet from the refinancing lender, a court order, or a valuation supporting the assumed sale price. An exit described as "we will sell it" with no marketing evidence and no valuation is not an exit; it is a hope.

Most bridge losses trace to exit failure rather than borrower dishonesty. The sale falls through, the refinance is declined, the works overrun, the settlement is appealed. Prudent lenders therefore test a second exit as well as the first, and prudent borrowers should have one.

Closed vs. open bridge loans

Closed bridge. The exit is contractually certain and dated — most commonly an exchanged sale contract with a fixed completion date. Because the repayment date is known, closed bridges are cheaper and easier to obtain.

Open bridge. No fixed exit date. The borrower expects to sell or refinance but has no binding commitment. Priced higher, underwritten harder, and usually capped at a lower loan-to-value (LTV) because the lender is carrying timing risk as well as credit risk.

The distinction is the largest single driver of pricing after LTV.

First and second charge

A first charge bridge ranks ahead of all other security over the asset. A second charge sits behind an existing mortgage or facility, and is repaid only after the first-ranking lender is satisfied.

Second charge lending is priced significantly higher, because the equity cushion available to the second lender is whatever remains after the first charge is cleared, and it disappears first in a falling market. Second charge also usually requires the consent of the first-ranking lender.

Cost structure

Bridge finance costs are layered, and comparing headline rates alone is misleading.

Interest. Quoted monthly. A monthly rate compounds into a much larger annual figure than borrowers often assume, and the gap widens if the term extends.

Arrangement or facility fee. Charged on drawdown, commonly as a percentage of the loan amount.

Exit fee. Charged on repayment by some lenders, sometimes as a percentage of the loan and sometimes of the property value.

Valuation and legal fees. Both the lender's and the borrower's, payable regardless of whether the loan completes.

Broker fee, where a broker arranged the facility.

Default interest. A substantially higher rate applying if the loan runs past its term. Given that overrunning is the most common problem in bridge lending, this term deserves close reading.

Three ways interest is handled:

• Serviced — paid monthly from the borrower's own cash flow. Requires demonstrable income.
• Rolled up — accrued and paid with the principal at the end. Nothing leaves the borrower's pocket during the term, but the balance grows.
• Retained — the lender deducts the full term's interest from the advance at the outset. The borrower receives less than the face amount, and any unused portion is typically refunded on early repayment.

Retained interest is the most common structure, and it is why the net amount received is always less than the loan amount agreed.

Bridge loan vs. other short-term finance

• Bridge loan: Repaid from a defined one-off event. Secured against an asset (usually property). Used to cover a timing gap before a sale, refinance, or receipt.
• Term loan: Repaid from ongoing income over years. Security varies. Used for long-term funding of an asset or expansion.
• Overdraft: Repaid from fluctuating trading receipts. Often unsecured or floating. Used for day-to-day working capital variation.
• Invoice finance: Repaid from the payment of specific invoices. Secured by the receivables themselves. Used for recurring gaps between invoicing and payment.
• Development finance: Repaid from the sale or refinance of the completed project. Secured by the site and the works. Used to fund construction in staged drawdowns.

The closest relative is development finance, which is effectively a bridge released in tranches against build progress and underwritten on gross development value rather than current value.

Underwriting a bridge loan

Asset value and LTV. The current market value, and often a separate 90-day or forced-sale value reflecting what the asset would realise under time pressure. Bridge LTVs are conservative precisely because the lender may have to sell quickly.

Charge position. First or second, and the balance outstanding on any prior-ranking security.

Exit credibility. Documentary evidence of the exit, its timing, and the sum it will produce, with headroom over the redemption figure.

Term selection. Enough time for the exit to complete with margin. Loans written to the shortest plausible timetable overrun routinely.

Borrower capability. Less about income and more about whether the borrower can execute the exit — track record on similar transactions, quality of professional advisers, experience with the asset type.

Second exit. What repays the loan if the primary exit fails.

Legal enforceability. Whether the security interest is properly perfected and how long enforcement would take in the relevant jurisdiction. In markets where realising security takes years, the effective security value is much lower than the valuation suggests.

Risks

For borrowers:

• Exit failure. If the sale collapses or the refinance is declined, the loan still falls due. Default interest applies, and the secured asset is at risk.
• Cost of overrun. Rolled interest plus default rates compound quickly on a facility that was priced for months.
• Undervalued forced sale. Enforcement sales rarely achieve open-market prices.
• Underestimating total cost. Arrangement, exit, valuation and legal fees together can exceed the interest on a short facility.

For lenders:

• Concentration in one asset class. Bridge books are often heavily property-weighted, so a market correction hits the whole portfolio at once.
• Valuation risk. Bridge lending depends more completely on valuation accuracy than income-based lending does, because the valuation is the entire security.
• Extension creep. Rolling a facility rather than enforcing can convert a short-term exposure into a long one that was never underwritten as such.
• Enforcement cost and delay. A strong legal position is worth little where realisation takes years.

When a bridge loan fits, and when it does not

Reasonable fit: a genuine timing mismatch, with a documented exit, a short window, and an asset with clear title and a reliable market.

Poor fit: covering a shortfall with no identified exit, funding ongoing operating losses, or substituting for term finance the borrower cannot qualify for. In the last case the bridge simply defers the underwriting problem at high cost, and the exit — the refinance — is precisely what the borrower has already been unable to obtain.