A bridge loan is basically a short term loan -- usually repaid in less than a year. The reason for a bridge loan, or bridging finance, is to cover the expenses of the borrower until a more long term loan or funding is secured. Bridge loans provide immediate cash flow for borrowers as payment for various abrupt financial obligations while waiting for the approval of standing deals or contracts.

Bridge loans have high interest rates and need to be backed by collateral. What they do, as their name suggests, is to bridge the gap between a time when the borrower has the more permanent loan or financing that he's seeking and the present with its immediate financial needs. Bridging finance is used in many different financial situations.

The owner of a business may secure bridging finance in order to secure needed working capital while he completes equity financing deals which can often take several months.

People often resort to bridge loans when they are planning to sell a home. The real estate market in a specific area can move slowly at times, or a home can just be difficult to sell. People who purchase a new home before selling their existing home may take out a bridge loan so that they can pay for their expenses and financial obligations until a sale is finalized on the existing home and they have access to the proceeds. A bridge loan may also be used as "chain breaking", meaning a borrower may use it to purchase a new house even while their old house is still on the market.

Another useful aspect of bridge loans is they can be used to boost credit scores. Bridge loans may be used by borrowers to pay outstanding debts, thus making a positive credit score and enabling the borrower to apply for other loans that are more permanent and larger in amount. These loans also help bridge the gap between leaving one job and starting another. Similarly, bridge loans may be useful to finance relocation costs when someone moves because of their job.

Bridging finance can be done in less than a day, as the high interest rates, short duration, and collateral backing allow for less stringent credit and background checks.