Excerpt from the Growth Company Guide 4.0
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Bridge Loans refer to short-term borrowings that fund a company's operations for a fixed period of time. The purpose of most bridge loans is to provide a company with funds to continue operation until longer-term financing can be secured. That funding may come in the form of a loan, the sale of company securities, or receipt of a large payment. The need for a bridge loan can arise when a company runs out of cash before it succeeds in obtaining more capital investment through an offering of long-term debt or equity. Existing investors frequently provide the funding for bridge loans.

The short-term nature of a bridge loan creates pressure to complete the long-term financing package within the bridge loan term. Failure to find replacement funding within the term can result in penalties. Depending on the conditions in the bridge loan agreement, a default can give the lender substantial rights to company assets or additional influence over management. Negotiating an extension to a bridge loan agreement can be costly. If the bridge loan came with options granted to the lender, additional options may be required or the cost of the loan my increase. By the same token, management's eagerness to liquidate a bridge loan by finding replacement financing can cause it to conceded points in the permanent financing  it would not otherwise concede.

The most important terms to consider when negotiating a bridge loan include the following:

• Term. The longer the term is the better. In any event, the term should be long enough to give management a reasonable opportunity to find and close a long term funding to replace the bridge loan.

• Interim Payments. From management’s perspective, a loan without interim payments is preferable.

• Interest Rate. The cost of the loan should always be considered carefully. If options or warrants are granted to the bridge lender with the loan, the value of those options or warrants should be included in the cost.

• Conversion. Will the lender agree to convert its bridge loan into the security sold in the permanent financing that replaces it? A conversion commitment can make it easier to find replacement funding because it demonstrates the bridge lender’s long-term commitment to the company.

• Security. Is the loan secured by company assets or stock? While less protective of the investor, an unsecured loan would be preferable to management and easier to document and complete.

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 converting the bridge are less favorable than the anticipated terms of the "take-out" financing.

See: Financing Agreements, Investment Memorandums, Letters of Intent, Leverage, Negotiation.