What is a bridge loan? How it works and pros & cons

Businesses can access cash fast with a bridge loan. For example, imagine a key supplier offers you a limited-time discount on a high-demand product. With a bridge loan, you could fund the purchase within days, sell the stock quickly, and repay the loan in full from the sales. 

Bridge loans are growing in popularity. The American Association of Private Lenders noted a 31% year-over-year increase in applications. But they're more expensive than standard small-business loans, even with a good business credit score. Their repayment structure can also cause cash flow problems. 

Read on to learn how bridge loans work, how to apply for one, their pros and cons, and the best alternative loan options, including QuickBooks loans.

How does a bridge loan work?

What are the requirements for a business bridge loan?

Examples of business bridge loans 

The pros and cons of bridge loans

What are some alternatives to a bridge loan?

How to leverage QuickBooks financing for small businesses

What are your funding options?

How does a bridge loan work?

Business bridge loans are short-term loans that provide immediate funding for small business owners.

Businesses use bridge lending when they need immediate capital while waiting for long-term financing, such as a commercial real estate or business buyout loan. This type of financing can help businesses avoid cash flow disruptions and continue their operations until long-term funding is secured. 

Traditional banks, private lenders, and alternative lenders offer business bridge loans. However, bridge loans usually have higher interest rates and shorter repayment periods than conventional business loans.

What are the risks of a bridge loan?

The risks associated with bridge loans come from their structure and the way businesses manage repayment. Because they’re short-term loans, the biggest danger is running out of time to refinance or repay them. 

Here are the six main hazards of bridge loans:

• 1. Need cash upfront: Like a mortgage, you need a deposit for a bridge loan. CBRE reports the average loan-to-value (LTV) ratio for bridge loans is currently 62.2%. So, if you want to buy inventory worth $100,000, that means the lender puts up $62,200, and you need $37,800 of your own capital.
• 2. Collateral and personal guarantees: To secure a bridge loan, you must offer collateral, such as real estate. If you default, the lender can sell those assets to recover what’s owed. You may also need to sign a personal guarantee—if the collateral doesn’t cover the full balance, the lender can pursue you for the rest.
• 3. Balloon payment shock: You pay the interest monthly, but the full principal amount at the end of the loan. This final payment can strain your cash flow, forcing you to refinance or sell your assets quickly.
• 4. Exit timing: Bridge loans are short-term, lasting six to 24 months. If the funds you’re counting on don’t arrive in time, you may need a costly extension or risk defaulting.
• 5. High finance costs: Bridge loans are expensive. Average interest rates range from 9% to 15%, according to LendingTree. You’ll also pay origination, legal, appraisal, broker, and exit fees.

If you want a loan with fixed monthly payments, no deposit requirement, no balloon payment, and no refinancing risk at the end, apply for a QuickBooks term loan.

When are bridge loans a good idea?

Bridge loans are a good option for businesses that need short-term financing to bridge the gap until long-term funding becomes available. The main benefits of bridge loans include quick access to capital, flexible terms and repayment options, and the ability to secure financing without selling existing assets at a lower price.

How much can you borrow for a bridge loan?

The maximum loan amount for a bridge loan will depend on the lender and the value of the collateral you’re willing to put up. 

According to the American Association of Private Lenders, the average bridge loan amount ranges from $550,000 to $650,000. Some lenders and brokers offer minimum loan amounts of around $10,000.

What are the requirements for a business bridge loan?

To apply for a business bridge loan, applicants must typically submit a loan application and provide information about the business.

While specific requirements vary by lender, you’ll generally need the following to qualify for a business bridge loan: 

• Financial statements: You’ll need detailed financial statements, including profit and loss (P&L) statements, balance sheets, and cash flow projections. For a quick refresher on balance sheets, read our article on assets and liabilities to understand how lenders assess your financial health.
• Collateral: To secure the loan, you may need to provide collateral like real estate, inventory, or equipment. If you fail to repay the loan, the lender can seize the asset you put up as collateral. 
• Use of funds: Lenders will likely request a detailed breakdown of how you plan to use the bridge loan. You may also include this as part of your business plan.
• Exit strategy: Lenders will want a clear repayment plan. This often involves refinancing with long-term financing, selling assets, or relying on cash flow. Some lenders may also check your debt service coverage ratio to determine whether your business can generate enough income to repay the loan if your planned exit doesn’t materialize.

Since bridge loans help provide temporary funding, ‌closing times matter. You can expect to close relatively fast, usually in just a few weeks.

Examples of business bridge loans

Access to immediate funds can significantly impact business acquisitions or commercial real estate purchases. Bridge loans can also help fund operations during a transitional phase.

Examples of bridge financing include:

• Real estate transactions: Some business owners ask, “What is a bridge loan in real estate?” to understand how it differs from a business bridge loan. Real estate bridge loans typically cover the gap between purchasing a new property and selling an existing one. 
• Acquisitions: Bridge financing can help with acquisitions when you need immediate funding to facilitate the transaction before securing long-term financing.
• Funding operations: Companies facing temporary cash flow shortages or awaiting a large payment may use bridge loans to cover operational expenses, payroll, or inventory purchases.
• Investments: Some investment managers use bridging loans to capitalize on time-sensitive market opportunities. They may repay the loan after collecting money from clients.
• Business disposal: When one company buys another, the seller often needs to clear debts before the deal closes. A bridge loan can cover those costs and is repaid when the sale closes and funds are released.
• Milestone-based work: In projects like construction, software development, and manufacturing, buyers release payment only when a milestone is met. Suppliers may use bridge loans to cover upfront costs when they need to start work but won’t be paid until delivery or project sign-off.

Seasonal businesses that experience fluctuations in revenue may use bridge loans to cover expenses during slow periods and repay during peak selling season. Meanwhile, companies looking to expand, launch new products, or enter new markets might use bridge loans to fund these initiatives.

The pros and cons of bridge loans

Bridge loans come with both pros and cons. Bridge financing advantages include quick access to capital and flexibility despite higher rates.

Advantages of using bridge loans

Business bridge loans fill cash flow gaps, allowing companies to navigate lean periods, pursue growth opportunities, or make strategic investments. 

The biggest advantages for businesses include:

• Quick access to capital: Businesses can take advantage of time-sensitive opportunities or cover unexpected expenses.
• Less stringent underwriting: Compared to traditional bank loans, bridge loans have less rigid requirements, making them accessible to businesses with less-than-perfect credit. 
• Provides a bridge: These loans can help businesses maintain operations and cash flow during transitional periods, such as when waiting for a larger loan or investment.

Bridge loans are short-term and typically require repayment within a year. This can create financial pressure for businesses if long-term financing is not secured within the expected timeline. A bridge loan can also help an SMB act fast on time-sensitive deals. 

Example: A machine shop owner spots a CNC line at an excellent price during a receivership sale. (A CNC line is a set of machines that cut and shape metal parts with high precision.)

The seller needs payment within five days, but the bank can’t move that fast. So the machine shop owner takes out a six-month bridge loan, buys the equipment, and repays the loan by refinancing with a standard equipment finance facility. By acting quickly, the shop expands production capacity, wins new contracts, and increases revenue.

Disadvantages of using bridge loans

Business bridge loans can be a risky financial strategy. The main drawbacks include:

• Higher interest rates: Debt bridge funding often comes with higher rates due to its short-term nature.
• Dilution: Bridge loans may require issuing equity or convertible securities, which can dilute existing shareholders’ ownership stakes. 
• Possible loss of ownership: There is a risk of default if the business can’t secure long-term financing and repay the loan on time, resulting in the loss of ownership or key assets.

For example, consider a home-goods store that signs a lease and takes out a nine-month bridge loan to fund the deposit and permits. The plan is to open by month six and pay off the loan with the first three months of sales. However, inspections and contractor delays push the opening to month nine.

With no revenue, there isn’t enough cash to make the final payment. The owner pays for an extension and refinances on tighter terms, raising the total cost. The extra fees and higher interest eat into profits for months after opening.

What are some alternatives to a bridge loan? 

If the interest rate or qualifications for a bridge loan seem too strict, you may consider other short-term funding options.

Here are alternative business funding options to bridge loans for short-term financing:

• Merchant cash advances provide a lump sum of immediate funds in exchange for a percentage of future credit card sales, making it a quick and accessible option for short-term funding.
• Invoice factoring involves selling accounts receivable to a third party at a discount in exchange for immediate cash. Invoice financing works best for businesses with a significant amount of outstanding invoices.
• Business lines of credit provide a revolving credit line for immediate funding needs, with the flexibility to repay and borrow as needed.
• Small Business Administration (SBA) loans can offer favorable terms and lower interest rates for eligible businesses.

These alternatives differ from bridge loans in structure and repayment terms, and they may not require specific collateral. 

Repayment terms also vary. Bridge loans typically have a fixed repayment schedule, while cash advances, invoice factoring, and lines of credit may offer more flexible terms.

How to leverage QuickBooks financing for small businesses

A traditional bridge loan isn’t always the best option when you need funding fast. Though this loan can fill gaps that banks and credit unions overlook for significant short-term funding, it is expensive and often secured against valuable collateral.

For most business needs, like covering payroll or restocking inventory, a standard term loan or line of credit is often a better choice. With QuickBooks Capital, you can arrange funding in a day or two, with fixed monthly payments and no balloon payment at the end.

Advantages of the QuickBooks integrated system

QuickBooks already holds the financial data lenders need. Our team can instantly review your profit and loss, cash flow, and balance sheet data to assess your eligibility for financing. That means you get a decision in minutes. If you’re approved, the money will be deposited into your account within one to two business days.

In contrast, with a traditional bridge loan, you’ll need to gather statements, chase down documents, and wait weeks for underwriters to review your financial history. Additionally, most lenders require upfront cash for broker fees, valuations, and deposits—QuickBooks Capital doesn’t. There’s no collateral, no deposit, and no hidden charges.

Here’s how each option stacks up:

What are your funding options?

As with any critical business decision, do your due diligence on your financing options. Look for a lender that offers the funding you need with repayments that won’t strain your cash flow. Women-led firms can also explore women-owned business funding programs, as well as loans and lines of credit.

Check your accounting software to see how much cash you have available at the end of every month. This will give you a clear idea of how much you can afford to pay back each month. Make sure you have a plan for every dollar and cent so the loan works for your business and not the other way around. 

To explore a bridge loan alternative, check out the various QuickBooks loans to see if you qualify.