Do you own a business or a company? If you have, you might be familiar with the word finance. Every company needs finance to meet their needs that cannot be fulfilled through their investments. Do you know what Bridge Financing is? Well, it is short-term financing that aims to provide funds to the companies unless they get long-term financing.
Bridge Financing refers to temporary financing that intends to cover a company’s short-term needs or costs until they secure regular long-term finance. The sound of the term seems like the bridge that connects a company to debt capital through short-term finances.
Any institution that is in need to cover short-term needs can choose the way of ‘Bridge Financing’. These are taken for a period of around 2 weeks to 3 years, being a more expensive one.
How does it work?
When a company runs out of money, Bridge Financing fills the gap until that company gets the funds. This financing is mostly used to fulfill short-term needs (working capital needs). Generally, several ways can arrange bridge financing. The company uses any of the ways according to their needs and requirements. Debt, equity, and IPO are some options for bridge financing.
Types of Bridge Financing
Since bridge financing provides short-term finance to the company in need, the following are various types of bridge financing.
Open Bridge Financing
Finance that is more flexible and meets the need for the company in need, stands out to ‘Open Bridge Financing’. This is an instance of the people who face legal barriers when it comes to the sale of a house.
Every company should consider the right financial solution for getting the finance. Some of the points about Open Bridge Financing are:
- This provides short-term financing.
- It provides immediate finance to the firm or entity in need.
- The rate of interest is higher and involves risk to the lender.
Closed Bridge Financing
Finance where the borrower carries a credible and clear plan is known as ‘Closed Bridge Financing’. Wherever it is a guarantee about the repayment of the funds from the borrower, either selling old residential property or through the mortgage agreement, stands for the closed bridging finance.
Here, people set a fixed date for the repayment of the finance. Besides, the value of the finance depends on the contract or leased thing.
Uses of Bridge Financing
Generally, firms borrow money through bridge financing to meet their short-term needs. Thus, the following are how bridge financing is used:
- To provide a small amount of money to the company to carry out short-term needs.
- To help and distress the companies who are not performing well due to the shortage of funds for daily, or working capital needs.
One business is running out of cash and needs $60000 for investing in the day-to-day activities of the business. They will approach the financial institution or venture to borrow, and appear for the opportunity to bridge financing.
- These finances have a quick and instant process.
- Helps the company to manage short-term needs.
- Improves the credit profile of the lender as they can lend money on time.
- There is flexibility in the terms and conditions of such financing.
- It carries a high rate of interest, thus stands to be expensive.
- It involves the risk from the side of the borrowers.
- There is more need for such finances so the borrower may not have a to it.
Bridge Financing is a form of financing that provides access to short-term borrowings to meet short-term needs. These borrowings generally involve high interest rates and higher risk. It helps the entity to build itself without getting rid of short of money.