Bridge Loans . . . 

are short-term financing agreements that fund a company's operations until it can arrange a more comprehensive longer-term financing. The need for a bridge loan arises when a company runs out of cash before it can obtain more capital investment through long-term debt or equity.

Bridge loans are risky. Whether a company's original investors or an outside lender provides the bridge loan, its short-term nature creates pressure to complete the long-term financing package quickly. A default under a bridge loan usually gives the lender substantial rights to company assets or personal assets of management. Management's eagerness to liquidate a bridge loan can cause it to make concessions it would not otherwise make when negotiating the longer-term financing that will "take out" the bridge loan.

When accepting bridge financing, management should be careful to understand the consequences if the long-term financing does not come through on time. It helps to negotiate as long a term as possible on a bridge loan and to borrow enough money to carry the company through the loan's term. If the bridge financing is with an outside investor, management should explore the possibility of converting it into longer-term financing if the need arises, even if the terms of extending the bridge are less favorable than the anticipated terms of the "take-out" financing. Bridge loans should be documented and follow a clear written understanding of the main business terms of the company's total financing package. See: Financing Agreements, Investment Memorandums, Letters of Intent, Leverage, Negotiation.