Bridge Loan

A bridge loan is a short-term loan, typically no longer than four months in duration, and sometimes as short as a few weeks, that is made to a company to cover expenses while a financing round is completed. Banks and lending institutions offer bridge loans to companies that have solid cash flows and can show that a financing round is near completion. Key investors participating in a financing round may offer bridge loans to the company to cover expenses prior to the closing of a financing round. Generally, a bridge loan is used to ensure a business can remain operational at the tail end of an investment round or during unexpected delays in closing an investment round. A bridge loan is typically disclosed by the company in the schedules to the purchase agreement for the investment round as a liability of the company. Generally, investors prefer that their investments be used to grow the company instead of paying down the company’s existing debt. However, a bridge loan, which is designed to cover a short period while an investment round is wrapped up, is often an exception made by an investor. A company should be sure to keep investors in the loop about its borrowing plans during financing rounds.