Bridge Loans Explainer
A bridge loan is short-term financing designed to cover a gap until a more permanent source of capital arrives. Companies use bridges to close acquisitions, refinance a near-term maturity, complete a property transaction, or fund operations while waiting for a bond sale, equity raise, asset sale, or long-term loan.
Because the expected exit is central, lenders focus on timing and certainty of the takeout. Pricing often rises over time to encourage prompt repayment. The facility may include commitment fees, market-flex provisions, conversion into longer-dated debt, collateral, guarantees, or limits on additional borrowing and distributions.
A bridge creates execution certainty when a transaction cannot wait for permanent financing. In acquisition finance, a committed bridge can support a buyer’s proof of funds even if the company expects never to draw it. That assurance has value, so fees may be owed despite little or no borrowing.
The main risk is that the planned exit fails. Capital markets may close, an asset sale may be delayed, or valuation may fall, leaving expensive debt outstanding. Borrowers need contingency plans and adequate liquidity. Lenders must underwrite the company as if they could own the exposure longer than the marketing timetable suggests.
A bridge funds needs before permanent capital is available.
The expected takeout is part of the original credit decision.
Step-up pricing encourages repayment or refinancing.
Commitment and conversion features also affect economics.
Markets, asset sales, or equity plans can fail.
Both sides should plan for a longer holding period.
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