Glossary - Bridge Loan
A bridge loan is a short-term financing option used by companies and individuals to meet immediate cash flow needs until more permanent financing is secured. These loans often have higher interest rates and are typically used in real estate transactions, mergers and acquisitions, or by startups awaiting a funding round. Bridge loans are intended to 'bridge' the gap between the need for immediate funds and the future receipt of funds.
Also known as
- Swing Loan
- Interim Financing
- Gap Financing
Use cases examples
- Real Estate Purchase Agreement: The buyer agrees to secure a bridge loan to cover the purchase price of the property until the current residence is sold.
- Startup Funding Agreement: The company shall receive a bridge loan to cover operational costs until the closing of Series A financing round.
Considerations for investors
- Bridge loans offer a higher risk and return profile, requiring due diligence on the borrower's ability to repay or secure long-term financing promptly.
- Investors should consider the purpose of the loan and how it affects the company's growth prospects or asset value.
Considerations for founders
- High interest rates of bridge loans could impact the financial health of the startup if the anticipated funding round or revenue does not materialize as expected.
- Short-term nature requires prompt repayment, which may pressure the company's cash flow.
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