What is a Bridge Loan?

A bridge loan is exactly what it sounds like. It is a financial structure designed to span a gap. In the context of a startup, that gap is almost always a cash flow shortage between two significant events. You have money now, but it will run out before you close your next major round of funding or reach profitability.

The bridge loan is the lifeline that gets you to the other side.

Technically, it is a short-term loan used until a person or company secures permanent financing or removes an existing obligation. In the startup ecosystem, this usually takes the form of a “bridge round.” This is not typically a loan from a bank in the traditional sense. Instead, it often involves existing investors putting in more capital to keep the lights on.

These loans are generally structured as convertible debt or convertible notes. The lenders give you cash now. In exchange, that debt converts into equity when you successfully raise your next priced round, usually at a discount to reward them for the risk.

Bridge loans act differently than standard venture capital injections or traditional bank loans. They are characterized by speed and cost. Because the company is often in a distressed or urgent state, the terms favor the lender.

Key features usually include:

• Short Duration: The term is typically 6 to 12 months. It is not permanent capital.
• High Interest: Interest rates can be significantly higher than standard loans, though this interest often accrues and converts to equity rather than being paid in cash monthly.
• Warrants or Discounts: To make the risk worth it, investors often get a discount on the share price of the next round, meaning they get more shares for their money later.

Not every cash shortage justifies a bridge loan. It is a specific tool for specific scenarios. The most common use case is when a startup is performing well but the timing of the fundraising cycle is off.

Perhaps you have a term sheet for a Series A, but the due diligence process is dragging on for three months. You only have one month of cash left. A bridge loan covers those two months.

Another scenario is the “metrics gap.” You might need six more months of data to prove a pivot is working before investors will commit to a large round. The bridge buys you that time to gather evidence.

The most critical concept to understand is the danger of the “bridge to nowhere.”

A bridge implies there is solid ground on the other side. If you take out a loan to extend your runway by six months, but you have no clear path to profitability, acquisition, or a new funding round at the end of that period, you have simply delayed the inevitable.

Founders must ask hard questions before signing these papers. Is the next round truly secured? Is the acquisition offer real? If the answer is ambiguous, the bridge loan may just be adding debt to a company that is about to fail. It requires a realistic look at the business fundamentals, stripping away the optimism that usually drives entrepreneurship.