Bridge Financing bridges the gap between the time when company is running out of funds and when company can expect to receive infusion of funds. It is usually used to fulfill short term working capital requirement of company. It serves as a bridge between one period of funding and another, more permanent source of funding.
There are two types of Bridge Financing- Debt Bridge Financing & Equity Bridge Financing.
- In Debt Bridge Financing, Companies take short-term loans at high-interest rate, it is designed to kerb temporary financing need.
- In Equity Bridge Financing is for a company who does not want to incur debt at high-interest rate. Therefore, they can seek help from venture capital firms to provide it with capital until it can raise a larger round of Equity financing. In this, the company may opt for selling out certain percentage of its equity ownership to venture capital firms in return for financing up to certain months, which is expected to get the profitability of the company.