What is Bridge Financing
Bridge financing, often in the form of a bridge loan, 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.
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 later on. 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.
BREAKING DOWN Bridge Financing
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 it 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, they 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 percent 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.