Bridge Financing

What is Bridge Financing?

Bridge Financing (also called a Bridge Loan or Bridge Round) is a short-term funding solution used by companies to cover immediate cash needs until they can secure permanent financing or resolve a liquidity event—such as a long-term loan, investment round, or IPO.

It is called a "bridge" because it fills the gap between two financing events.

Key Characteristics

1. Short-term: Usually lasts from a few months up to a year.
2. High-interest rates: Higher than long-term loans due to increased risk and urgency.
3. Fast approval: Structured quickly to meet urgent capital needs.
4. Collateralized or convertible: Can be backed by assets or convertible into equity (in startups).

When Is Bridge Financing Used?

1. Before a larger funding round
   Startups often raise bridge funding to maintain operations until the next equity round.

2. Before an IPO
   Companies may raise funds to meet pre-listing expenses or boost working capital.

3. During M&A deals
   Buyers may use bridge loans to quickly fund an acquisition while arranging longer-term financing.

4. To manage cash flow gaps
   Companies with delayed receivables or seasonal business may use it to stay afloat.

Types of Bridge Financing

Type	Description
Debt Bridge Loan	A short-term loan with fixed interest and repayment terms.
Convertible Bridge Note	A loan that converts into equity during the next funding round.
Equity Bridge Financing	Investors provide capital now for equity at a discounted price in a future round.

Example

A startup expects to raise ₹10 crore in Series A funding in 6 months but needs ₹1 crore now to pay salaries and vendors. It raises a bridge round of ₹1 crore from existing investors via a convertible note—which will later convert into Series A shares at a 20% discount.

Benefits

• Quick access to capital
• Buys time before long-term funding
• Flexibility in structuring (debt or equity)
• Can prevent disruption in operations or growth

Risks and Considerations

• High cost due to urgency and risk
• Dilution risk if converted to equity
• May pressure the company to close follow-on financing quickly
• Not suitable as a long-term solution

Bridge Financing in the Indian Context

• Used by startups before venture rounds via convertible debentures or SAFE notes
• Companies approaching IPOs may use it to fund regulatory, marketing, or legal expenses
• In real estate and infrastructure, bridge loans are used until banks release sanctioned funds