Bridge Loan

A bridge loan is a type of short-term loan that provides immediate and temporary financing for a startup company.

A bridge loan (also called a swing loan) is a type of short-term loan that is commonly used by startup founders in order to serve as a form of working capital. It is a loan type that helps bridge the gap between one event and another, such as a company needing funds during the course of raising a new round of capital. Naturally, startup companies will often experience cash flow shortages, meaning they need financing to continue operating until the new capital is in place. There are many reasons why a startup founder would need a bridge loan but the primary use case is to meet gaps in capital.

Bridge loans are typically used to finance common working capital needs, such as funding payroll, inventory, accounts receivable, property taxes, and other non-capital related expenses until a new round of capital is raised. Bridge loans also enable start-ups to fund the purchase of essential assets or complete key milestones such as product launches. Bridge loans may also be used as a means of leverage for a company that is looking to increase their value prior to a sale or public offering. By taking advantage of a bridge loan, a company can use the funds to make key enhancements that improve their outcome and value.

‍

A startup founder is preparing for a seed round of funding for their startup. In the meantime, the company experiences a cash flow crunch and it needs working capital to meet payroll and other expenses. The founder applies for a bridge loan from a banking institution that is then repaid when the seed round is closed and the funds are delivered. The bridge loan provides the company with the capital needed in order to meet its immediate needs and gives the startup time to close its round with investors.