Bridging equity is a short-term financing solution used to bridge the gap between a current financial situation and future financing. Private equity firms often use bridging capital to complete a leveraged buyout, while bridging loans can provide quick cash for individuals or companies with high interest rates and shorter repayment periods.
Bridging equity refers to a period of short-term financing used to get a person or business through a tight financial situation until long-term financing can be secured. In this way, equity acts as a bridge between the current situation and the future eventuality. Private equity firms often use bridging capital as a way to complete a leveraged buyout of an existing company. Loans known as bridging loans, which are often issued by lenders expecting quick repayment at high interest rates, are another way for businesses to receive short-term capital.
Many loans and similar financing arrangements are often set up to take place over a long period of time. However, there are some cases in which it is necessary for individuals or institutions to receive financing quickly and in advance. These situations arise when the person or group that needs financing must receive the capital quickly to execute a certain agreement or escape a short-term debt obligation. Bridging equity is one way this financing can be arranged, allowing those who receive the capital to meet their short-term needs and eventually earn long-term gains.
Private equity groups, which specialize in buying up existing companies and turning around their fortunes, often need more bridging capital. For example, a private equity group might have a company targeted as a potential buying opportunity. But they may lack the initial funds needed to purchase the existing property.
At that point, equity investors can approach a bank as a potential provider of bridging capital. If the bank agrees, it will provide the remaining capital to the private equity group to complete the purchase process. Once the deal is reached, the bank may look to sell the capital to other investors. By providing the capital, the bank assumes some of the risk associated with the capital, so it will ensure that the terms of the agreement are favorable enough to offset that risk.
In certain cases, bridging loans can be used to provide bridging equity. These can be useful for those who need quick cash or even for companies that expect an infusion of funds in the future but need money to finance operations at the present time. Lenders who offer bridge loans often require that the loans be repaid in a much shorter period of time than the average loan term, and often charge high interest rates to account for the risk involved with these loans.
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