What is Bridge Financing in the UK?

As a company looking to raise money over a short period, you may consider bridge financing options. Bridge financing is a common short-term financing method that businesses use in a variety of situations. 

Typically, bridge financing takes the form of a ‘bridge loan’, where a lender will provide money at higher interest rates to cover short term business costs. It can also take the form of equity bridge financing or initial public offering (IPO) bridge financing – both of which can also be useful in different situations.

This article will elaborate on what bridge financing is. It will also explain some of the situations in which a bridge finance arrangement could be beneficial to your business. 

What is Bridge Financing?

Put simply, bridge financing is a type of short-term financing that companies use to solidify their position. In this way, financing acts as a ‘bridge’ between the borrower’s short-term and long-term financial position. You can usually arrange bridge financing with an investment bank or a venture capital firm, most often in the form of a bridging loan.

Often, bridge financing is used by businesses that need to meet short-term operational and working capital costs to keep their business running. As a result, bridging loans typically come with a higher interest rate than other debt instruments. This reflects the additional risk to lenders. 

At the same time, bridge loans can be used in a number of different situations and can be structured in very different ways.

Real Estate Bridge Loans

Bridge loans are often used in real estate purchases, especially by property developers. In this context, the borrower can receive the loan to quickly close a property deal. They will pay back the lender at a certain point, usually when the property is sold. 

Often, property developers will use a bridge loan while they are seeking permit approval to carry out a project. This is because loans from traditional lenders are difficult to secure if there is a high degree of uncertainty. 

Similarly, a bridging loan may benefit someone seeking to purchase a new home with money raised from selling their existing home. This is usually only a good idea if there is a significant expectation that the existing home will be sold soon and the bridge loan will be repaid. In homeowner situations, the Financial Conduct Authority (‘FCA’) regulates the loan agreement. 

Using a bridge loan in this context can be highly effective to secure quick funding. However, higher interest rates can make this a costly and risky endeavour.

Equity Bridge Financing

A business could opt for an equity bridge financing arrangement instead of simple debt bridge financing. This can help the business avoid the high-interest rates associated with simple debt bridge financing. Usually, a venture capital firm receives an equity share in the business in exchange for financing over a set period of time. In some cases, this can be up to 12 months. 

This can help your business avoid incurring debt with high levels of interest. The venture capital firm can also profit if they believe the business will become profitable. If you are considering equity bridge financing, you should weigh up the cost of losing an equity stake in the business in exchange for short-term financing.

IPO Bridge Financing

IPO bridge financing is another instance in which you can use bridge financing. This involves a company taking out a bridge loan to cover costs in the buildup to an IPO. An initial public offering is where a business is listed on a public stock exchange for the first time. The process of an IPO usually has several short-term costs, such as stock exchange fees and underwriting. 

Once the initial public offering has been completed, the cash raised is immediately used to pay off the loan fees. In this instance, the investment bank completing the underwriting process is also usually the source of the bridge loan.

Key Takeaways

As a business that would benefit from short-term financing to cover costs, it is sometimes a good idea to consider bridge financing. You can use bridge financing to secure funding to cover the short-term costs related to your individual or business needs. Bridge financing usually comes in the form of a bridge loan. 

Often, these loans come with high-interest rates to reflect the higher risk for the lender. In some instances, however, a company may prefer to offer equity to the lender instead of taking on debt with high-interest rates. 

Businesses commonly use these agreements to:

• cover their operational and working capital costs;
• close a property acquisition deal quickly; or 
• cover the costs involved with an initial public offering. 

If you would like to learn more about what bridge financing can do for you, our experienced corporate lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today at 0808 196 8584 or visit our membership page.

Frequently Asked Questions