THE FIRST QUESTION · THE LOAN · CAPACITY
Two borrowers each carry debt of three times EBITDA. One sells software on three-year contracts; the other builds new houses for sale.
// WORKED EXAMPLETHE ARITHMETIC A DECISION RESTS ON
Bridging Loan: a Worked Example
The loan is only as good as the day it ends.
BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED
// THE SHORT ANSWER
A bridging loan is lent against a date rather than a business. The lender is not relying on years of profits but on one receipt due within months, so the credit work is about that receipt: whether it is contracted or only expected, how late it could arrive, what the security would fetch if it does not come, and how far the balance will have grown by then. Interest is often added to the loan rather than paid, which means every month of delay is paid for out of what the exit leaves the borrower.
BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.
// MAKE THE CALL
Issue 11 — The Term Sheet War. A nine-year client brings a competitor's term sheet: 40 basis points inside your pricing, covenant-lite, and a Friday deadline. Your call first, then the senior banker's.
// 01 — WHAT A BRIDGE IS REPAID FROM
A term loan is repaid from trading cash over years, and the lender reads the business that produces it. A bridge is repaid from a single receipt, and the lender reads the receipt. The common forms differ in what that receipt is. A property bridge lets a buyer complete a purchase before its existing property has sold. A refinance bridge holds a loan in place while a longer facility is arranged. An acquisition bridge funds a purchase on time and is replaced by bonds, institutional term debt or equity once those can be raised, and in a UK public takeover it is written on certain-funds terms, so that the cash can be confirmed as available when a firm offer is announced.
Lenders also divide bridges by how firm the exit is. A closed bridge has a contracted exit with a date, such as an unconditional sale agreement or a signed refinance commitment. An open bridge has an exit that is planned but not yet bound, such as a property listed for sale. Open bridges are the riskier of the two and are usually priced that way.
// 02 — HOW A LENDER SIZES IT
Balance at the exit = advance + fees added + interest added to the exit date
Net exit proceeds = sale price or refinance amount − costs of the exit
Cushion = net exit proceeds − balance at the exit
Loan to value, exit = balance at the exit ÷ value of the security
Interest is handled in one of three ways. It can be serviced, paid monthly from the borrower's cash, which only works where there is cash to pay it. It can be rolled up, added to the balance each month so that interest is charged on interest. Or it can be retained, deducted from the advance on day one to cover the expected term. Rolled-up and retained interest suit a borrower with little income until the exit, but both mean the lender sees no monthly payment that would warn it of trouble.
Two numbers move against the lender at once if the exit is late: the balance grows, and the price a property fetches after months on the market may fall. A lender therefore tests the cushion on a slower and cheaper exit as well as the planned one, and asks for a second way out if the first fails.
// 03 — THE EXAMPLE
A marine engineering company, constructed for this page like every figure on it, is buying a larger yard for US$4.0m, funded by a term loan from its bank. Its present yard, unencumbered and valued at US$2.8m, is on the market. To pay the balance of the purchase before the old yard sells, it takes a US$1.8m bridge for nine months, secured on the old yard, with a second mortgage on the new one that ranks behind the term lender, by agreement with it. Interest is 9% a year, rolled up monthly, and a 2% fee is added. The rates are the example's, not a market norm.
(US$000s) Planned Late and lower
Advance 1,800 1,800
Fee added (2%) 36 36
Balance on day one 1,836 1,836
Interest rolled up 128 (9 mo) 228 (15 mo)
Balance at the exit 1,964 2,064
Sale price 2,800 2,520
Selling costs (3%) −84 −76
Net proceeds 2,716 2,444
Cushion 752 380
Loan to value, old yard 70% 82%
In the planned case the yard sells in nine months at its valuation, and the company keeps US$752,000 after repaying the bridge. In the second case the sale takes fifteen months and the price is 10% lower. The bridge agreement in this example steps the rate up to 11% after month twelve, so the balance reaches US$2.064m, and the cushion halves. Nothing in the company's engineering business has changed; the date and the price have.
The second mortgage on the new yard is the lender's answer to a third case, in which the old yard does not sell at all. Then the bridge is repaid either by the term lender agreeing to lend more against the new yard, or by the bridging lender selling the old one itself.
// 04 — HOW IT DIFFERS FROM A TERM OR DEVELOPMENT LOAN
The nearest neighbours share the bridge's logic in part. A development loan is also repaid from sales, but it funds construction in stages against a budget, and the lender carries building risk before it reaches sale risk. A residual stock loan is a bridge in all but name: it refinances units left unsold after completion and is repaid as they sell. A term loan is the opposite case, repaid from earnings over years, which is why a bridge that cannot be repaid on time often ends up refinanced as one, if the business can carry it.
A bridge also concentrates refinancing risk. With an ordinary facility, refinancing is a question for the end of a long term. With a bridge, it is the whole loan, compressed into months.
DEFINED IN ONE PARAGRAPH → · REFINANCING RISK → · PROPERTY DEVELOPMENT FINANCE →
// 05 — WHERE IT DECIDES A FILE
The credit paper for a bridge is mostly about evidence of the exit. For a sale: a signed agreement and its conditions, or for an open bridge, a realistic sale value and time on the market rather than a hopeful listing price. For a refinance: whether the incoming lender's offer is binding and what conditions it carries. For an acquisition bridge: whether bond or equity markets will be open when the bridge needs them, and how sharply the margin rises if they are not.
The document then decides what happens when the date passes. The bank may extend for a fee, step up the rate, charge default interest or enforce, and in a property bridge enforcement means a mortgagee sale, which tends to realise less than an owner's sale. A bank often prefers a late exit to a forced one, and the extension terms are where that choice is priced. Each month the bank allows is paid for by the borrower, out of the cushion the exit was meant to leave.
// SOURCES
The documents the statements on this page rest on. Each was opened and checked when cited.
- New Zealand Parliamentary Counsel Office, Credit Contracts and Consumer Finance Act 2003 — section 11, Meaning of consumer credit contract — A credit contract is a consumer credit contract where the debtor is a natural person and the credit is used wholly or predominantly for personal, domestic or household purposes — the New Zealand line in the FAQ.
- Australian Securities and Investments Commission, National Credit Code (regulatory resources page) — The Code applies where the debtor is a natural person or strata corporation and credit is provided wholly or predominantly for personal, domestic or household purposes or for residential investment property — the Australian line in the FAQ.
- The Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (SI 2001/544) — article 61(3)(a), regulated mortgage contract; article 61A, exclusions — Credit to an individual or trustees, secured by a mortgage on land at least 40% of which is used or intended to be used as or in connection with a dwelling, is a regulated mortgage contract unless article 61A excludes it — the UK line in the FAQ (the Order is prospectively revoked by FSMA 2023 but in force at November 2026).
// QUESTIONS PEOPLE ASK
- What is the difference between an open and a closed bridging loan?
- A closed bridge has a fixed repayment date tied to an exit that is already contracted, such as an unconditional property sale or a signed refinance. An open bridge has no contracted exit, only a plan, such as a property listed for sale, and usually a maximum term instead of a fixed date. Because the lender is less certain when and whether it will be repaid, an open bridge is generally priced higher and lent more conservatively.
- Are bridging loans regulated?
- It depends on the borrower and the purpose. A bridge to a company for business purposes generally falls outside consumer credit law in all three markets. Lending to individuals can fall inside it: in New Zealand, credit used wholly or predominantly for personal, domestic or household purposes; in Australia, credit for those purposes or for residential investment property; in the UK, a loan to an individual secured on land at least 40% of which is used, or intended to be used, as a dwelling can be a regulated mortgage contract, supervised by the Financial Conduct Authority, unless an exemption applies, as it does to some investment property loans.
- What happens if a bridging loan is not repaid on time?
- The lender's options are set by the document. It may agree an extension, usually for a fee and sometimes at a higher rate; it may charge default interest; or it may enforce its security, which for property means a mortgagee sale. Interest keeps accruing throughout, so a late exit costs the borrower in two ways: a larger balance, and often a lower price if the asset has been on the market for longer.
- How is interest paid on a bridging loan?
- In one of three ways. Serviced interest is paid monthly from the borrower's own cash. Rolled-up interest is added to the loan each month and repaid with it at the exit. Retained interest is deducted from the advance at the start to cover the expected term. Rolled-up and retained interest let a borrower without income until the exit take the loan, but they reduce the cash it receives or the proceeds it keeps.
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