Definition of Bridge Loan in finance

Bridge Loan is a term used frequently in investment banking, private equity and venture capital. It is a loan which is used to enable a firm to undertake an acquisition / takeover / LBO / IPO.

In an LBO or other corporate acquisition-type activity, the PE or VC firm will go to the investment bankto seek a bridge loan, then will make the purchase of the target company. The firm will then use its newly acquired target to issue corporate high-yielding bonds to pay off the bridge loan, and then will use future cash flows to pay the bond yields.

In an IPO, the bridge loan is secured in order to ensure that the company can continue operating whilst it navigates through the tumultuous time of IPO'ing onto the stock market. The company will give the investment bank some stock at a cheap price in order to pay off the bridge loan, and the investment banksells the stock (if it so wishes) in order to recoup its loan.