Bridge Financing - Explained
What is Bridge Financing?
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What is Bridge Financing?
Bridge financing (normally a bridge loan form) is a temporary source of financing to companies and other business units to strengthen their Short-term state up to when a long term funding source works out. In most cases, Bridge financing sources are from Investments banks and venture capital institutions in the form of either debts or ownership contribution such which is capital. Bridge financing in a company with a shorter runaway than its future financing options and there is a need for the company to remain liquid to obtain long-term funds. Bridge financing fulfills the gap between when an institution funds are planned for depletion to when replenishment is made. The financing in most cases is used to cushion an organization from the temporary risks of fund shortages by providing working capital. For instance, there is a notion in companies that when growth possibilities are likely but short term funds like for five months funding is to be experienced, then Bridge capitalization means can fulfill the would be shortages.
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How Does Bridge Financing Work?
A bridge loan is one of the possibilities for a company taking temporary and more expensive loans with a high interest rate. Corporations looking for bridge financing through bridge loans need a relative degree of cautiousness although interest rates might be so expensive resulting in more financial troubles. A good example is when the request for a loan amounting to $500,000 which is approved and is to be subdivided with the initial tranche coming after six months. The company might resolve for a bridge loan. With this situation, the company can request for the same period bridge loan to sustain the entity until the first tranche is received in the company's account When companies do not want to suffer from the exorbitant interest rates by acquiring these bridge finance, they can resort to venture capital companies for funding until the company can finance itself. In such a case, the entity might sell a percentage like 10 percent of its shareholding interest to a venture company in reciprocating the financial support while anticipating profitable operation during the time the firm would be insolvent. Investment banking defines bridge financing as a method used by companies before IPO to ensure there is enough fund for IPO activities. On the IPO completion, the funds raised by IPO is used to pay back the loan obligation. Investment bank underwriters provide these funds during the new issue, and there is consideration given by a new company purchasing the bridge finance. Consideration involves giving some shares at a discount, and this forms the basis of future payments for the future sales of new shares.