Legal Definitions - bridge loan

A bridge loan is a type of short-term financing designed to provide immediate funds to an individual or entity while they await the approval or completion of a more permanent, long-term financing solution. It acts as a temporary "bridge" over a financial gap, ensuring that a transaction or project can proceed without interruption. These loans typically have higher interest rates and are expected to be repaid quickly, often within a few months to a year, once the anticipated long-term funding becomes available.

• Example 1 (Residential Real Estate): Sarah wants to buy a new house, but she needs to sell her current home first to access the equity for a down payment. The perfect new house just came on the market, and she doesn't want to lose it while waiting for her old house to sell. Sarah takes out a bridge loan, secured by the equity in her existing home, to cover the down payment and closing costs for the new property. Once her old house sells, she uses the proceeds to repay the bridge loan in full.

  This illustrates a bridge loan because it provides the necessary funds to purchase the new home immediately, "bridging" the financial gap until the sale of her current home provides the long-term capital.

• Example 2 (Business Acquisition): "Innovate Solutions Inc." is in the process of acquiring a smaller competitor, "Future Tech LLC." Innovate Solutions has secured a commitment for a large, long-term bank loan to finance the acquisition, but the bank's due diligence and closing process will take another 90 days. Future Tech LLC, however, requires the deal to close within 30 days. To meet this deadline, Innovate Solutions Inc. obtains a bridge loan from a specialized lender to fund the acquisition immediately.

  Here, the bridge loan allows Innovate Solutions to complete the acquisition on Future Tech's timeline, covering the period until their primary, long-term bank financing is fully disbursed.

• Example 3 (Commercial Property Development): A property developer has identified a prime parcel of land for a new office complex. They have a detailed development plan and a firm commitment from a major institutional investor for the multi-million dollar construction financing. However, the institutional funding won't be released until all necessary zoning approvals and building permits are finalized, a process that could take six to nine months. To secure the land and begin preliminary site preparation work immediately, the developer obtains a bridge loan.

  This example demonstrates a bridge loan providing the upfront capital needed to purchase the land and start initial work, thereby "bridging" the time until the much larger, long-term construction financing becomes available.