- Bridge financing
Bridge financing is a method of
financing, used to maintain liquiditywhile waiting for an anticipated and reasonably expected inflow of cash. Bridge financing is commonly used when the cash flow from a sale of an asset is expected after the cash outlay for the purchase of an asset. For example, when selling a house, the owner may not receive the cash for 90 days, but has already purchased a new home and must pay for it in 30 days. Bridge financing covers the 60 day gap in cash flows.
Another type of bridge financing is used by companies before their
initial public offering, to obtain necessary cash for the maintenance of operations. These funds are usually supplied by the investment bank underwritingthe new issue. As payment, the company acquiring the bridge financing will give a number of stockat a discountof the issue price to the underwriters that equally offsets the loan. This financing is, in essence, a forwarded payment for the future sales of the new issue.
Bridge financing may also be provided by
banks underwritingan offering of bonds. If the banks are unsuccessful in selling a company's bonds to qualified institutional buyers, they are typically required to buy the bonds from the issuing company themselves, on terms much less favorable than if they had been successful in finding institutional buyers and acting as pure intermediaries.
There are 2 types of bridging finance. Closed bridging and Open Bridging.
Closed bridging finance is where you have a date for the exit of the bridging finance and are sure that the bridging finance can be repaid on that date. This is less risky for the lender and thus the interest rate charged are lower.
Open bridging is higher risk for the lender. This is where the borrower hasn't got an exact date for the bridging finance exit and may be looking for a buyer of the property or land.
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Look at other dictionaries:
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