Bridge Financing

Bridge financing is short-term funding used to cover immediate cash needs until a company secures longer-term financing or generates expected revenue. It can take the form of debt (a bridge loan), equity (selling ownership stakes), or specialized arrangements tied to an upcoming IPO.

Key takeaways

• Provides temporary capital to cover short-term working capital needs, project costs, or IPO expenses.
• Can be structured as debt or equity; bridge loans are typically high-interest and short-term.
• Terms often include protections for lenders or investors, such as higher default rates, convertibility into equity, or mandatory repayment triggers.

How bridge financing works

Bridge financing fills the timing gap between when funds are needed and when more permanent financing or revenue becomes available. Lenders or investors provide capital on short notice, usually expecting repayment or conversion soon after the long-term financing (bank loan, equity round, or IPO) closes. The specific structure depends on the company’s situation and the provider’s risk tolerance.

Types of bridge financing

Debt (bridge loan)

• Short-term loan with high interest rates.
• Used to cover immediate cash shortfalls until scheduled loan tranches or other financing arrive.
• May include penalties or step-up interest rates if not repaid on time.

Equity bridge financing

• Investors (often venture capital firms) provide capital in exchange for equity.
• Avoids interest expense but dilutes existing owners.
• Investors accept the risk expecting the company’s value to increase.

IPO bridge financing

• Short-term funding provided before a company’s public offering to cover IPO costs and interim needs.
• Typically supplied by underwriters or investment banks, often repaid from IPO proceeds.
• May involve discounted share allocations to the underwriter as part of repayment.

Typical terms and lender protections

Bridge financing agreements commonly include:
* High interest rates or escalating rates on overdue amounts.
Convertibility clauses allowing lenders to convert some or all principal into equity at a pre-agreed price.
Mandatory repayment triggers if the company receives additional funding above a certain threshold.
* Short maturities (often months to one year).

Example

A mining company needs $12 million to develop a new site but cannot wait for its planned equity raise. A venture capitalist provides $12 million as bridge financing at 20% annual interest, payable in one year. The term sheet allows the investor to convert up to $4 million of the loan into equity at $5 per share and increases the interest rate to 25% if the loan isn’t repaid on time.

Risks and drawbacks

• Costly: high interest rates and potential equity dilution can be expensive.
• Short repayment windows increase refinancing risk.
• Harsh covenant terms can limit flexibility or trigger conversion/dilution.
• Can worsen a company’s financial position if the expected exit or financing doesn’t materialize.

Common questions

Q: Can a bridge loan be paid off early?
A: Usually yes—many bridge loans allow prepayment without penalty, but terms vary. Early repayment can reduce interest expense if cheaper financing becomes available.

Q: What is the main advantage of bridge financing?
A: It provides fast, temporary cash to maintain operations, close a deal, or bridge to a planned financing event when no other timely options exist.

Bottom line

Bridge financing is a useful short-term tool for companies needing immediate capital before a longer-term funding source or revenue arrives. It offers speed and flexibility but is often costly and comes with terms that protect the lender or investor. Use it when the expected payoff justifies the expense and the repayment or conversion terms are acceptable.