A bridge loan is short-term financing used to cover a timing gap until a sale, refinancing, capital raise, or other expected source of repayment occurs.
A bridge loan is short-term financing used to cover a timing gap until a sale, refinancing, capital raise, grant, or other expected source of repayment occurs. Gap financing and prefinancing are broader labels often used for the same temporary-funding function.
The defining feature is the planned exit, not merely a short maturity. A bridge loan is risky when the expected exit is uncertain, delayed, or insufficient.
A company agrees to buy a business for $12 million. It expects a $9 million term loan and a $3 million equity contribution to close in 90 days, but the seller requires payment in 30 days. A bridge lender funds the acquisition until the permanent capital is available.
If the term loan is delayed or reduced, the bridge does not repay itself. The company may need an extension, additional equity, an asset sale, or a restructuring. The bridge analysis therefore focuses on closing conditions and fallback liquidity, not just the expected date.
| Feature | Bridge loan | Permanent financing |
|---|---|---|
| Purpose | Cover timing gap | Fund the asset or business over a longer horizon |
| Maturity | Short | Usually longer |
| Pricing | Often higher with additional fees | Usually based on longer-term risk and structure |
| Repayment source | Specific exit event | Operating cash flow, amortization, or long-term capital |
| Main risk | Exit fails or arrives late | Long-run credit, rate, and asset risk |
Review the amount and timing of the expected exit, conditions that must be met, third-party commitments, collateral and priority, interest reserve, covenants, extension rights, fees, fallback liquidity, and downside recovery.
A signed sale or financing commitment can still contain conditions. Analysts should distinguish a firm, fully documented source from a forecast or preliminary expression of interest.
Assuming expected proceeds are committed proceeds. Forecast cash is not the same as available funding.
Ignoring extension economics. Extension fees, rate increases, and new conditions can materially change cost.
Matching only dates. The exit amount must also cover principal, accrued interest, fees, and transaction costs.
Overvaluing collateral. Forced-sale discounts, lien priority, and enforcement time affect recovery.
Using bridge debt for a permanent shortfall. Temporary financing cannot fix an asset or business that cannot support a sustainable capital structure.