A bridge loan is a short-term loan that gives a borrower money now and is meant to be repaid from a specific, expected source of longer-term funding later. That source might be a bond issue, an equity raise, the sale of an asset or a permanent loan. Bridge loans usually run from a few weeks to about two years and cost more than ordinary bank loans because of their short life and the risk that the "take-out" funding never arrives.
The term covers two main markets. In corporate finance, banks provide bridge loans to fund mergers and acquisitions so the buyer can sign a deal before raising bonds or shares. In real estate, bridge loans help buyers purchase a new property before selling an existing one, or fund a building until it qualifies for a long-term mortgage. Bridging finance is a recognised product in the UK property market, where it is offered by specialist lenders as well as banks.
Bridge loan in plain terms
A bridge loan is like borrowing a friend's car for a week while yours is being repaired. You need transport now, you know when your own car will be ready, and you plan to hand the borrowed one back as soon as it is. The arrangement works well as long as the repair really finishes on time.
A family that finds its next home before selling the current one faces the same problem with money. A bridge loan lets it pay for the new house straight away, then repay the lender out of the sale price of the old one. Because the lender is betting that the sale will happen soon and at a fair price, it charges more than a normal home loan and usually wants the property as security.
Bridge loans in acquisitions
When one company agrees to buy another for cash, it often cannot issue bonds or raise equity quickly enough, or does not want to reveal the deal before it is announced. Banks therefore commit to a bridge facility at signing. The buyer then aims to refinance the bridge through a corporate bond or, for weaker credits, a high-yield bond issue, which is why the arrangement is often called a "bridge-to-bond". If the markets cooperate, the bridge is never drawn, or is drawn and repaid within months.
In the UK, a bidder making a cash offer for a listed company must show that it has the funds available, and its financial adviser must confirm this. Bidders therefore sign "certain funds" bridge facilities with very limited conditions to drawing. In leveraged buyouts, bridge loans may also stand in for the planned senior secured debt or mezzanine financing until those layers are placed with investors.
Pricing and terms
Bridge facilities are priced to encourage early refinancing:
- Step-up margins. The interest margin rises every few months the loan stays outstanding.
- Commitment and ticking fees. Lenders charge for holding funds available between signing and completion.
- Funding and duration fees. Fees are charged when the loan is drawn and again at set dates if it remains unpaid.
- Conversion terms. If the loan is not repaid within about a year, it may convert into a longer term loan or into exchange notes at a capped rate.
- Market flex. Arranging banks may be allowed to change the pricing or structure of the take-out debt, within limits, to get it sold.
Property bridging loans are usually priced at a monthly rate and secured with a first or second charge over the property, often lending only a set share of its value, measured by the loan-to-value ratio. Interest is frequently "rolled up" and paid at the end rather than monthly, and the lender assesses the exit plan as closely as the borrower's income.
Risks
The central risk is that the exit fails. In 2007 and 2008, several banks were left holding large bridge loans for buyouts after the bond and loan markets froze, a situation the industry calls a "hung bridge". The banks either kept the loans on their balance sheets or sold them at a loss. Rising interest rates in 2022 caused similar problems for some acquisition financings.
For property borrowers, a slow or failed sale means the loan becomes expensive quickly, and a fall in prices can leave too little equity to repay it, risking default and forced sale of the property. Regulators such as the UK's Financial Conduct Authority regulate bridging loans secured on a borrower's own home, while loans for business or investment purposes are largely unregulated in many countries. Lenders manage credit risk by taking collateral, insisting on a credible exit and keeping terms short.