Bridge Loan
Short-term financing used temporarily until permanent long-term funding is arranged.
A bridge loan is short-term financing that provides temporary capital to cover a gap between immediate funding needs and the completion of longer-term permanent financing. As the name suggests, a bridge loan 'bridges' the borrower from where they are today to where they expect to be once permanent financing is in place—typically within 6 to 24 months.
Bridge loans are used in multiple contexts. In M&A, acquirers use bridge loans to fund acquisitions while arranging permanent debt (high-yield bonds, syndicated term loans) or equity offerings—the bridge is committed at signing, providing deal certainty, then refinanced in the capital markets after closing. In real estate, bridge loans fund property acquisition or renovation before stabilization (full occupancy) enables a permanent mortgage. In startups, bridge rounds provide runway capital between larger funding rounds when a company needs more time to hit milestones.
Bridge loans carry higher interest rates than permanent financing (reflecting their short-term nature, urgency, and rollover risk), and typically include meaningful fees: origination fees, upfront structuring fees, and commitment fees. In leveraged finance, bridge loans designed to be refinanced with high-yield bonds are called 'bridge to bonds'—they include automatic conversion provisions that increase the interest rate over time (step-ups) if the bridge is not refinanced by specified deadlines, incentivizing rapid permanent financing.
Real estate bridge lenders focus on loan-to-value and the strength of the exit strategy (sale or refinancing) rather than current income generation. Bridge loans for value-add or transitional properties may allow interest-only payments during the renovation/lease-up period.
Bridge failures—where a borrower cannot refinance the bridge on schedule—can be financially devastating, as step-up rates and extension fees rapidly erode economics.
FAQs
What is a bridge-to-bonds commitment in M&A financing?
A bridge-to-bonds commitment is a financing commitment from investment banks to provide a short-term bridge loan if a transaction closes before a high-yield bond offering can be completed. The acquiring company needs financing certainty at deal signing, which a committed bridge provides, but ultimately intends to fund the acquisition through public high-yield bonds. The bridge commitment typically includes increasing interest rate steps (flex provisions) that make the bridge progressively more expensive if not refinanced quickly, strongly incentivizing the borrower to complete the bond offering as soon as market conditions allow after closing.
How are real estate bridge loans structured?
Real estate bridge loans typically have 12–36 month terms, interest-only payments (no amortization during the hold period), loan-to-cost ratios of 65–80%, and rates of 8–14% (or SOFR plus a large spread) depending on asset quality and risk. They require a compelling exit strategy: either sale of the property (refinancing into proceeds) or refinancing into a permanent mortgage once the property achieves stabilized occupancy. Bridge lenders underwrite the exit scenario thoroughly—what must occupancy reach for the permanent lender to refinance, and how realistic is that timeline? Extension options (6–12 additional months) are common, often requiring payment of an extension fee.
What is a startup bridge round?
A startup bridge round is a small, short-term fundraise (typically in the form of convertible notes or SAFEs) used between larger priced equity rounds. Companies raise bridge rounds when they are not quite ready to raise a full Series A or B—they need additional runway to hit a key milestone (product launch, revenue target, pilot customer) that will justify a higher valuation in the next round. Bridge rounds are often raised from existing investors or angels, at terms designed to convert into the next priced round. They carry the risk of excessive dilution if future milestones are not met or if the next round is delayed longer than anticipated.
Related Terms
Revolving Credit Facility
Flexible bank credit line allowing repeated borrowing and repayment up to an approved limit.
Mezzanine Financing
Hybrid debt-equity capital subordinated to senior debt, carrying higher yields and often warrant coverage.
Term Sheet
Non-binding document outlining the key terms of a proposed investment or acquisition deal.
Federal Funds Rate
Interest rate at which banks lend reserves to each other overnight, set by the Federal Reserve.
