Overview

Short-term bridge loans give builders quick access to capital for land acquisition, early stage construction, or to cover timing gaps between financings. In my experience working with builders and lenders, these loans are most valuable when a clear draw schedule and an explicit contingency plan are in place.

How bridge loans are structured for builders

  • Term: usually 6 months to 36 months depending on exit plan and lender appetite.
  • Pricing: higher than permanent mortgage financing; private or non-bank lenders commonly charge higher rates and fees (pricing varies by risk and market).
  • Collateral and covenants: the development or lot is typical collateral; lenders require budgets, schedules, and periodic inspections.

Many lenders structure funds as milestone-based draws. Typical milestones include: initial deposit/land, foundation/underground utilities, framing, mechanical/electrical/plumbing (MEP), enclosure (dry-in), interior finishes, and certificate of occupancy/closeout. Lenders release funds only after inspection and documentation that the milestone was met.

Managing draw schedules

  1. Create a detailed construction budget tied directly to draw events. Break the project into 5–8 meaningful milestones.
  2. Sequence draws to match cash needs — avoid large early draws that sit unused. Hold back a realistic retainage (commonly 5–10%) until final completion to protect against punch-list costs.
  3. Require lender inspections and clear documentation (invoices, lien waivers, pay applications). This reduces disputes and speeds approvals.
  4. Plan disbursement timing with subcontractor pay cycles to avoid work stoppages.

In practice, lenders expect conservative timing. A buffer between when you request a draw and when funds arrive (often 3–10 business days) is normal and should be built into the schedule.

Contingency planning

  • Reserve size: industry practice is to set contingency reserves at roughly 5–10% for standard projects and 10–15% (or more) for complex, permitting-heavy, or volatile material-cost projects.
  • Sources for contingencies: include a dedicated line in the budget funded by bridge proceeds or equity injections. Lenders may require written proof of contingency funding.
  • Trigger rules: define when contingency funds may be used (e.g., change orders, unforeseen site conditions) and whether lender approval is required.

Proactive contingency controls—such as competitive bidding for change orders, holdbacks for unapproved extras, and strict document trails—lower the chance you’ll need additional financing mid-build.

Exit strategies lenders expect

  • Refinance to a permanent construction loan or mortgage once substantial completion or lease-up is achieved.
  • Sale or take-out by an investor at stabilization.
  • Conversion to inventory financing (for speculative units) or a longer-term construction facility.

When possible, have at least two credible exit paths documented for your lender: e.g., a commitment from a permanent lender plus pre-sales or a construction-to-permanent plan.

Real-world example (anonymized)

A mid-size builder I worked with faced a 90-day permitting delay. They used a short-term bridge to fund foundations and framing while the permanent lender extended its commitment conditioned on updated draws and an increased contingency reserve. Clear draw timing and extra contingency avoided contractor stoppage and kept the project on schedule.

Eligibility and who benefits

Builders, developers, and owner-builders with a credible budget, track record, and collateral (the property) are typical candidates. Lenders underwrite the sponsor’s experience, the project budget, marketability, and the proposed exit.

Common mistakes and how to avoid them

  • Underestimating contingency needs — use conservative percentages and stress-test budgets.
  • Poorly defined draws — map draws to tangible milestones with clear deliverables.
  • Not documenting pay applications and lien waivers — this delays draws and increases lender friction.

Practical tips

  • Build a 5–15% contingency depending on project complexity.
  • Use retainage (5–10%) to mitigate final compliance and punch-list risks.
  • Keep clear, timely records for each draw: invoices, lien waivers, inspection reports.
  • Discuss exit scenarios with potential permanent lenders before closing the bridge.

How this differs from other short-term options

Bridge loans focus on quick, milestone-driven funding for a specific project. For a decision between a bridge loan or other short-term financing (like a construction line of credit), consider the structure, speed, and cost. See FinHelp’s guide on When to Use a Bridge Loan vs Line of Credit and our overview of Bridge Loans for Real Estate: Uses and Costs.

Regulatory and tax notes

Interest and allowable project costs are often deductible business expenses for active builders; consult IRS guidance on deductible business expenses (irs.gov/businesses/small-businesses-self-employed/deducting-business-expenses). For consumer-facing borrowings, the Consumer Financial Protection Bureau explains borrower protections and disclosures (consumerfinance.gov).

Disclaimer

This article is educational and not personalized financial advice. Project specifics (tax treatment, eligibility, and terms) vary; consult a construction lender, tax advisor, or mortgage professional for tailored guidance.

Authoritative sources