Bridge Financing

What is 'Bridge Financing'

Bridge financing is an interim financing option used by companies and other entities to solidify their short-term position until a long-term financing option can be arranged. Bridge financing normally comes from an investment bank or venture capital firm in the form of a loan or equity investment. This type of financing only occurs when a company's runway is shorter than its future financing options, and it needs to remain solvent in order to obtain such long-term financing.

BREAKING DOWN 'Bridge Financing'

Bridge financing "bridges" the gap between the time when a company's money is set to run out and when it can expect to receive an infusion of funds. This type of financing is most normally used to fulfill a company's short-term working capital needs. If, for example, a company believes that if it can continue to grow over the next 10 months and will achieve profitability, but only has the capital to cover five months of operating expenses, a bridge financing option can give it five months' worth of working capital.

Debt Bridge Financing

One option with bridge financing is for a company to take out a short-term, high-interest loan, known as a bridge loan. Companies who seek bridge financing through a bridge loan need to be careful, however, because the interest rates are sometimes so high that it can cause further financial struggles. If, for example, a company is already approved for a $500,000 bank loan, but the loan is broken into tranches, with the first tranche set to come in six months, the company may seek a bridge loan. If this is the case, it can apply for a six-month, short-term loan that gives them just enough money to survive until the first tranche hits the company's bank account.

Equity Bridge Financing

Sometimes companies do not want to incur debt with high interest. If this is the case, companies can seek out venture capital firms for a bridge financing round to provide it with capital until it can raise a larger round of equity financing. In this scenario, the company may choose to sell 10% of equity ownership to a venture capital firm in return for six months of financing, which is expected to get the company to profitability.

Bridge Financing During an IPO

Bridge financing, in investment banking terms, is a method of financing used by companies before their IPO. This type of bridge financing is designed to cover expenses associated with the IPO and is typically short-term in nature. Once the IPO is complete, the cash raised from the offering immediately pays off the loan liability.

These funds are usually supplied by the investment bank underwriting the new issue. As payment, the company acquiring the bridge financing will give a number of shares to the underwriters at a discount on the issue price, which equally offsets the loan. This financing is, in essence, a forwarded payment for the future sales of the new issue.

RELATED TERMS
  1. Bridge Loan

    A short-term loan that is used until a person or company secures ...
  2. Bridge Insurance

    Insurance coverage for bridges. This type of insurance covers ...
  3. Bridge Bank

    A bank authorized to hold the assets and liabilities of another ...
  4. Equity Financing

    The act of raising money for company activities by selling common ...
  5. Hard Money Loan

    A loan of "last resort" or a short-term bridge loan. Hard money ...
  6. Bankruptcy Financing

    Financing arranged by a company while under the chapter 11 bankruptcy ...
Related Articles
  1. Investing

    What's a Bridge Loan?

    A bridge loan is a loan that “bridges” a borrower over a temporary shortage in funds on hand.
  2. Markets

    What is Equity Financing?

    Companies that are short on cash may need financing to pay for short-term needs or long-term capital expenditures.
  3. Investing

    What is Debt Financing?

    When a company needs to pay for something, it can pay with cash, or it may finance the purchase. Financing means that it gets the money from other businesses or sources, in return for obligations. ...
  4. Investing

    What's Short-Term Debt?

    Short-term debt appears on the liabilities portion of a balance sheet. It’s usually comprised of short-term bank loans, including bridge loans and credit card charges. Short-term debt is one ...
  5. Markets

    Is Equity Financing the Right Choice for Your Business?

    Discover the benefits and drawbacks of equity financing for a small business, and learn when equity financing should be used instead of debt financing.
  6. Markets

    What Does Finance Cover?

    Finance is the study of banking, leverage, credit, capital markets, money and investments, along with how they are used by individuals and companies.
  7. Investing

    The Basics Of Financing A Business

    From debt financing to equity financing, there are numerous ways to fund a business startup. But which is the best?
  8. Financial Advisor

    What Does Corporate Finance Do?

    Corporate finance is the subset of finance that involves how corporations use leverage to fund their operations and capital purchases.
  9. Markets

    The Difference Between Finance And Economics

    Finance and economics are often taught as separate subjects, but they are interrelated disciplines that influence one another in many ways.
  10. Markets

    The Difference Between Finance And Economics

    Learn the differences between these closely related disciplines and how they inform and influence each other.
RELATED FAQS
  1. What are the benefits for a company using equity financing vs. debt financing?

    Learn what some of the principal advantages are for a company that chooses to utilize equity financing in preference to debt ... Read Answer >>
  2. What are some ways of financing an acquisition?

    Learn about how business acquisitions are financed, from using private equity funds to receiving huge acquisition loans from ... Read Answer >>
  3. What are the different equity financing options available to companies in the United ...

    Learn what equity financing options are available to small, mid-sized and large companies within the United States and understand ... Read Answer >>
  4. What steps are necessary for a business to secure equity financing?

    Understand the steps necessary for a small business to secure equity financing for working capital, financing expansion or ... Read Answer >>
  5. What type of companies use downround financing?

    Read about the types of companies that are most likely to rely on down round financing, and why existing shareholders don't ... Read Answer >>
  6. What is finance?

    "Finance" is a broad term that describes two related activities: the study of how money is managed and the actual process ... Read Answer >>
Hot Definitions
  1. Quantitative Trading

    Trading strategies based on quantitative analysis which rely on mathematical computations and number crunching to identify ...
  2. Bond Ladder

    A portfolio of fixed-income securities in which each security has a significantly different maturity date. The purpose of ...
  3. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  4. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  5. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  6. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
Trading Center