What is a bridge loan?
A bridge loan is short-term financing put in place to fund a transaction at close, on the explicit expectation that it will be repaid out of a permanent financing raised soon after. It bridges the gap between a deal that has to close now and the long-term capital that is not yet in hand.
The classic use is M&A. A buyer needs committed money on the signing date to give the seller certainty of funds, but the bonds or term loan that will ultimately finance the purchase cannot be marketed until later. The arranging bank commits a bridge so the deal can close, then takes the borrower out into permanent debt.
Bridges are designed not to be drawn, or not to stay drawn for long. They carry escalating pricing — fees that step up and a coupon that ratchets the longer the bridge remains outstanding — precisely to push the borrower toward refinancing.
How a bridge loan actually works
A bridge is built to be temporary, with terms engineered to make permanence painful.
- Commit. The bank provides a committed bridge facility so the buyer can certify funds and sign.
- Close. If the permanent financing has not been placed, the bridge funds the purchase price at close.
- Take out. The borrower issues bonds or syndicates a term loan and uses the proceeds to repay the bridge — the takeout.
- Roll, if it must. A bridge that is not refinanced typically converts after a year into a longer-term loan and then into exchange notes, with pricing rising at each step.
Because the economics worsen over time, a bridge that actually stays outstanding signals that the takeout market closed on the borrower — usually a sign of stress, not strategy.