Bridge financing definition

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What is Bridge Financing?

Bridge financing is any type of short-term financing arrangement used to keep a business solvent until it can arrange for longer-term financing. This financing is needed to fund a firm’s operational needs, usually in relation to its expected working capital requirements.

Debt Bridge Financing

Bridge financing is usually in the form of debt, which is sourced from a venture capital firm or investment bank. Lenders want significant returns on their investments, so any funds loaned are likely to be at a relatively high interest rate. Also, these loans may be set up in tranches, so that a portion is to be repaid at regular intervals, such as once a quarter.

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Equity Bridge Financing

A business may want to avoid the risk of nonpayment associated with debt, and so secures equity bridge financing instead. This financing is usually sourced from venture capital firms. These entities will want to price the shares as low as possible, in order to take advantage of the upside if the share price eventually appreciates. This option is only available when the investor sees a substantial upside to the price of a company’s stock.

IPO Bridge Financing

Another variation is when bridge financing is used just prior to an initial public offering. In this case, the funds are needed to pay for the cost of the IPO. Once shares have been sold as part of the IPO, the financing is immediately paid off. In this case, the investment bank underwriting the stock issuance is typically the party that extends the loan.

Example of Bridge Financing

A new biotech company needs $50 million during the next year to fund its research into a potent new anti-virus medication. A private equity firm lends it the money, but only at a 15% interest rate, because of the risks involved. If the firm cannot pay the loan back at the end of the year, the interest rate will automatically increase by 3%, or the investor can convert the debt into the company’s shares at a highly favorable conversion ratio.