Bridge financing

This concept stands for short-term financing, such as a loan from a bank or a venture capital company, or, alternatively, capital-for-equity exchange, aimed to bridge the gap between the moment a company runs out of funds and receives its long-term financing.

Due to miscalculation or just unforeseen market conditions, companies may find themselves strapped for cash, even if they have just closed a big deal.

While it may take time until the cash from the big deal arrives, the company has to figure out ways to cover its bills today – that’s where bridge financing comes in. 

There are three core bridge financing models:

1. Debt Bridge Financing – in this situation, the cash-strapped company takes out a short-rem high-interest loan to cover its bills. This is a risky endeavor because desperate companies may be so tempted to secure cash quickly that they may agree to outrageously high interest rates that may, in turn, further exacerbate their financial difficulties. 

2. Equity Bridge Financing – in this situation, the company agrees to give away a fraction of its capital. This is usually provided by venture capital companies. The companies asking for these funds hope to eventually secure bigger financing through equity raising rounds.
3. IPO Bridge Financing – in this situation, the company prepares for an IPO, therefore it requires funds to cover expenses associated with going public. Upon completion of the IPO, part of the raised capital is used to eliminate the debt associated with the IPO.