Bridge, Gap, and Prefinancing

Bridge, gap, and prefinancing describe funding used before a longer-term or expected source of cash becomes available. The terms overlap, but the controlling questions are practical: how much money is needed, for how long, and which identifiable event will repay the temporary financing.

A Bridge Loan is the financing instrument. Gap financing emphasizes the shortfall between available and required funds. Prefinancing emphasizes that money is advanced before planned permanent funding or receipts arrive. The agreement, not the label, establishes payment and security rights.

Key Distinctions

The categories can overlap. A bridge refinancing can repay an old loan and provide new money while the borrower arranges permanent financing. Sources-and-uses analysis should separate each component.

The Exit Source Is the Core Credit Question

Temporary financing is only as strong as its repayment plan. Common expected sources include:

• proceeds from a signed asset sale;
• committed permanent or takeout financing;
• a capital contribution or securities issuance;
• collection of a receivable, grant, tax credit, or insurance claim;
• project completion followed by stabilized cash-flow financing; or
• refinancing after a documented covenant, occupancy, or performance milestone.

An expected source is not the same as an available source. Conditions, approvals, valuation, documentation, timing, and senior claims can reduce or delay proceeds.

How to Evaluate Temporary Financing

1. Quantify the gap. Include purchase or project cost, old debt payoff, fees, interest reserve, contingencies, and working capital.
2. Identify the exit. Specify the payer, amount, conditions, expected date, and evidence supporting the source.
3. Add a timing cushion. Compare contractual maturity with a delayed but plausible exit date.
4. Calculate carrying cost. Include cash interest, capitalized interest, unused fees, exit fees, extension fees, and professional costs.
5. Review collateral and priority. Determine which assets, proceeds, accounts, guarantees, and assignments support repayment.
6. Test the downside. Model lower sale proceeds, construction overruns, a smaller permanent loan, and additional time.
7. Read extension terms. An option may require lender consent, fees, principal reduction, covenant compliance, or fresh underwriting.

Common Mistakes

• Calling financing short-term without matching maturity to a realistic exit timeline.
• Treating a forecast refinance, sale, or grant as unconditional cash.
• Excluding capitalized interest and extension fees from total uses.
• Measuring gross exit proceeds without subtracting senior debt and transaction costs.
• Assuming new money equals the new loan amount rather than net incremental cash.
• Using a bridge repeatedly to postpone a structural cash-flow or leverage problem.
• Ignoring what happens if the temporary lender and permanent lender require incompatible terms.

Bridge and prefinancing arrangements can create concentrated maturity, collateral, and execution risk. This page provides general financial education, not individualized borrowing, lending, investment, or legal advice.

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