Next video:
Loading the player...

A bridge loan is a loan that “bridges” a borrower over a temporary shortage in funds on hand. Bridge loans are normally short-term in duration, usually less than one year. These loans help the borrower with cash flow needs until a more permanent funding capacity takes effect. Because of their short-term nature and extra risk, bridge loans often have higher interest rates than normal loans. Both individuals and corporations use bridge loans. 

For instance, ABC Corporation is planning to build a new production facility.  ABC will issue $20 million in corporate bonds to pay for the new factory.  Due to favorable conditions in the construction market, ABC can get a better price on its factory if it starts immediately. But it will take ABC six months to issue the bonds. In order to start immediately, ABC approaches XYZ Bank for a bridge loan it can use to secure funds to start the construction.  Once ABC sells its bonds, it will use part of the proceeds to pay off the XYZ Bank bridge loan.

Individuals often use bridge loans when selling and buying houses.  If Juanita found a new home she wants to purchase, but has not yet sold her existing home, she can get a bridge loan, secured by her existing home, that she can then use as a down payment for the new home she wants to purchase. When she sells her old house, part of the sales proceeds will be used to pay off the bridge loan.

Related Articles
  1. Investing

    What's Short-Term Debt?

    Short-term debt appears on the liabilities portion of a balance sheet. It’s usually comprised of short-term bank loans, including bridge loans and credit card charges. Short-term debt is one ...
  2. Retirement

    Business Owners: A Guide To Qualified Retirement Plan Loans

    Thinking of adding a loan feature to your company's plan? Here's what you need to know.
  3. Personal Finance

    Understanding Term Loans

    A loan from a bank for a specific amount that has a specified repayment schedule and a floating interest rate.
  4. Personal Finance

    Home Improvement Loans: What Are Your Best Options?

    If you plan on taking out a home improvement loan, you should know what your options are and which ones might be best for your situation.
  5. Personal Finance

    Different Needs, Different Loans

    Find out what options are available when it comes to borrowing money.
  6. Managing Wealth

    When Are Personal Loans a Good Idea?

    You never want to borrow money for frivolous reasons, but these five circumstances might warrant it.
  7. Personal Finance

    All About Government Loans

    There are many reasons to seek a government loan rather than one from a private lender. Government loans typically have low interest rates and offer fixed or subsidized options, as well as deferred ...
  8. Personal Finance

    How To Apply For a Personal Loan

    Learn about different avenues for applying for a personal loan, and learn valuable tips to help you get your personal loan application approved.
  9. Retirement

    Sometimes It Pays to Borrow from Your 401(k)

    401(k) loans have been demonized, but they're often the most beneficial source of cash.
Trading Center