Bridge capital

Bridge financing refers to short-term funding helping a company meet immediate needs while it prepares for a larger, long-term financing. This type of financing acts as a “bridge” to span the gap between two funding rounds or in important financial transaction. For example, a company may need to bridge the purchase of a property while the company waits for the sale of another to close.

Due to its riskier nature, bridge financing often comes with higher interest rates than traditional loans. On the other hand, the terms are typically more flexible than traditional loans to accommodate the company’s uncertain financial situation. Most often, payment will be made in full when the company receives the new capital or a longer-term loan.

Bridge financing can take the form of either debt or equity. In the case of debt, it often comes as a short-term loan with a higher interest rate. Alternatively, it can be structured as equity, where investors receive shares or convertible notes that can convert into equity at a later, usually more favourable, valuation.

Common scenarios for bridge financing include bridging the gap between funding rounds. For instance, a start-up might use bridge financing to maintain operations, fund the final stages of product development or ramp up marketing efforts to improve its valuation before the next funding round.

Another common scenario would be pre-IPO financing. In this case, a company would use bridge financing to cover the expenses associated with the initial public offering (IPO), including underwriting fees and stock exchange fees. Typically, the company will repay the loan right after the IPO with cash raised from the offering.