Bridge loans are often used in the real estate industry, helping investors get fast financing to purchase properties before selling them for a profit. Those same advantages of bridge financing — speed and simplicity — can also help business owners spur financial growth. How do these loans work and when are they a good fit?

What Are Bridge Loans and How Do They Work?

Bridge loans are a type of gap financing. This financing gets its name from what it does: help your business with short-term funds until you have enough revenue to cover the needs yourself.

In real estate, for example, the bridge loan can be used to buy a property and cover the cost of improvements, but it needs to be repaid in six months to a year. Once the real estate business finishes remodeling, they put the real estate on the market, sell the home and pay off the bridge loan with part of the profits.

In business, bridge financing covers a similar need. It helps you cover costs until you get paid or receive long-term financing.

For example, you may need to purchase a large volume of inventory for a customer’s order. You don’t have the funds right now, but you will as soon as your client pays you. With a bridge loan, you can get the funds quickly, buy the inventory and then pay off the loan with your revenue.

What Are the Benefits of Bridge Financing?

Many companies of different sizes rely on bridge loans every month. Others use this type of financing periodically for large purchases. There are many advantages to gap lending compared to traditional loans:

• Speed: You can qualify for a bridge loan in a couple of days. This can help you purchase things such as inventory as soon as possible. Customers are happy when they get their complete order on time.
• Requirements: Traditional loans are very strict when it comes to credit rating, time in business, cash flow and average monthly revenue. Bridge financing is far more accessible. Often, your credit rating doesn’t matter.
• Flexibility: Unlike traditional funding, bridge loans let you use the funds however you want. You can pay employees, purchase raw materials, invest in equipment or do other things to help your company grow.

When Is Bridge Financing a Good Fit?

Bridge loans are only for short-term needs. They work great when you have incoming capital, such as with inventory that you’re planning on selling quickly. They also help businesses that need to wait a month or two for clients to pay invoices.