Bridge financing is a way for companies, just before their IPO, to obtain the cash they need to maintain operations throughout the process. Bridge financing can come in the form of stand-alone subordinated debt or equity transactions. Most often it is found in the form of subordinated debt. Usually the funds are supplied by the investment bank who will, in turn, receive shares of the company at a discount from the declared issue price. This discount will typically offset the total amount of the bridge loan . The financing is basically a forward payment for the future sale of the stock by the investment banker.
This additional financial leverage can facilitate:
- Mergers and acquisitions financing
- An emerging growth opportunity
- A management or other leveraged buyout
- Corporate debt refinancing
- Corporate restructuring
As subordinated debt, the rate and terms of funding usually correlates with the position it holds in the company’s funding rounds. As a later stage investment, its position is in the final round of financing prior to an IPO. If committed at later stage it has less risk and is less expensive than just past the startup level. But if the company were to go bankrupt, subordinated debt holders would be the last on the list to be payed back. After the senior debt holders were repayed, the creditors with subordinated debt would get all that is left over. It is not uncommon for the amount they receive to be less that what they invested.