Bridge Financing
Bridge financing is a short-term capital injection intended to sustain a company's operations until a larger, longer-term funding event — such as an equity round, debt refinancing, IPO, or acquisition — is completed, and it typically carries higher costs than permanent capital to reflect its interim and often urgent nature.
The bridge metaphor is apt: this capital spans a gap between the company's current cash position and a forthcoming liquidity or financing event. Bridges are used in many contexts — by startups approaching the end of their runway while negotiating a new venture round, by private equity portfolio companies financing a tuck-in acquisition while a larger credit facility is arranged, by real estate developers covering the period between construction completion and permanent mortgage placement, and by public companies funding operations while waiting for a large contracted revenue payment or asset sale to close.
In the venture capital context, a bridge round is most commonly structured as a convertible note with a short maturity of six to eighteen months. The note accrues interest and converts to equity at the next priced round, often at a discount of 10 to 20 percent to the new round price or subject to a valuation cap. Bridge notes are typically offered to existing investors who have the strongest informational advantage about the company's progress and who have the most to lose if the company fails before reaching its next milestone.
The cost of bridge financing reflects its urgency and structural risk. Interest rates on bridge notes are higher than conventional debt. Bridge lenders frequently negotiate additional protections including most-favored-nation clauses that guarantee terms at least as favorable as any subsequent bridge lender, or springing covenants that give the lender enhanced control rights if defined milestones are not met by a specified date.
A key risk in bridge financing is that the anticipated permanent funding fails to materialize. If a Series B falls through after a company has drawn a bridge, the bridge note matures with no conversion, the company faces a default, and the lender may be forced to renegotiate or write off the position. Founders must therefore be honest about the probability of the permanent financing close before committing to the obligations of a bridge instrument.
Bridges that are extended repeatedly — sometimes called zombie bridges — often indicate a deeper financing problem and can create complicated cap table dynamics that deter new institutional investors. Each successive bridge extension typically requires renegotiating terms, and the accumulation of senior convertible notes above common equity can create overhang that makes the economics of a new equity round unattractive to incoming investors.
In real estate and infrastructure, bridge loans serve a different but analogous purpose: financing construction-phase projects or value-add renovations until stabilized cash flow qualifies the asset for a conventional long-term mortgage. These bridge facilities are typically one to three years in term, carry floating-rate interest above benchmark rates, and require clear exit strategies including refinancing projections and conservative downside stress tests.