Bridge Loan

A bridge loan is a short-term loan that bridges the period until final financing is in place. Companies use it when they need capital quickly but the permanent solution is still pending. Once the actual financing is secured, the bridge loan is repaid. In acquisition finance it serves a particular purpose: a buyer is generally expected to show at signing that funds are secured, while placing a high yield bond or a syndicated loan takes weeks and depends on market capacity.

Banks therefore give a firm commitment for the full amount, so the bidder can offer on a near certain funds basis, and the bridge is replaced after completion by the intended long-term financing. To ensure the bridge does not stay on the banks' books, it is deliberately made unattractive: depending on the agreement, the margin steps up at fixed intervals. If refinancing is not completed on time, the structure may provide for an extension or conversion into longer-term loans or tradable notes. For the borrower this is a predictable but expensive safety net. Beyond acquisition finance, bridge loans appear ahead of property sales, before an initial public offering, or to cover a maturity whose refinancing is not yet complete.

A bridge loan differs from a revolving credit facility, which is permanently available for working capital swings, and from a venture bridge round, which converts into equity rather than being repaid. For the seller, reviewing the financing commitment is a work step in its own right, because commitments differ considerably: a firm undertaking conditional only on completion is a different thing from a letter expressing willingness to finance subject to numerous reservations. The conditions of the commitment, the creditworthiness of the committing bank and its validity period are therefore examined. In auctions, producing a robust commitment is regularly among the requirements of the process letter for the binding offer.