Bridge finance is judged almost entirely on one variable: whether the exit is real. Everything else, tenor, security, covenant architecture, pricing, follows from that single question. A group that can answer it with documents rather than adjectives is usually well served by a bridge. A group that cannot is usually about to convert a timing problem into a capital problem, and to pay a premium for the privilege.
What a bridge is actually for
Transitional finance exists to cover a gap between two dated events, where the second event is already substantially determined. The classic cases are familiar to anyone who has run a treasury function across borders: a sale agreement signed and awaiting satisfaction of conditions; a refinancing that has passed credit committee and is awaiting documentation; a regulatory licence or change of control consent lodged and progressing; a capital call with a known settlement date; a repayment of shareholder debt scheduled to follow a completion step.
In each case the group is not asking a lender to underwrite an outcome. It is asking a lender to underwrite a calendar. That distinction is what makes the instrument coherent. The borrower knows what will repay the facility, knows who will pay it, and can describe in ordinary language what remains to be done between today and that payment. The lender is taking timing risk and, to a degree, execution risk on conditions outside the borrower’s control, but it is not taking market risk on an asset that has never been tested.
Where the underlying purpose is a corporate transaction rather than a property or licence event, the bridge is often the least disruptive way to preserve a structure that has already been designed. Unwinding a holding platform because a payment date moved by a quarter is an expensive way to solve a scheduling problem, and the tax consequences of an interrupted step plan are rarely symmetrical.
The exit test, applied honestly
The discipline that separates sound bridge finance from expensive optimism is a structured interrogation of the exit, and four questions do most of the work. The first is who is on the other side, because a named, identified counterparty with its own board approval is a different proposition from a market that is expected to produce a buyer. The second is what has been agreed in writing, and the distinction is not a fine one: a signed agreement with conditions precedent is a commitment, while an indicative term sheet, a heads of terms subject to contract, or a credit appetite expressed verbally is not.
The third question is who controls the remaining conditions. Conditions in the hands of a regulator carry timing uncertainty but usually not outcome uncertainty once the file is complete, whereas conditions in the hands of the counterparty, particularly those framed as satisfaction in its discretion, are options rather than obligations. The fourth question follows from the first three and is the one most often skipped: what happens if the date slips. Not whether it can slip, but what the borrower does when it does, because a bridge without a credible term-out, extension mechanic or alternative repayment path is a facility with one plan.
An exit that survives all four questions supports a bridge. An exit that fails the second or third does not, however attractive the underlying economics look on paper.
When the exit is a hope
The failure pattern is consistent and recognizable. The repayment source is a disposal process that has not been launched. The refinancing depends on a valuation that must first improve. The consent is described as a formality, but no application has been filed. The exit is a fundraise, and the investors are described as interested. In each of these cases the borrower is not bridging a gap; it is buying time in the hope that the gap closes itself.
The economics of that position are unforgiving. Bridge pricing is calibrated to short duration and rapid repayment. Held for a long period, it becomes among the most expensive money on the balance sheet, and it typically sits senior, secured, and with the tightest covenant package in the capital structure. A facility designed to be repaid quickly and then not repaid quickly does not simply become ordinary debt; it becomes debt with maturity pressure, step-up economics and a lender whose incentives have changed.
A bridge is not a substitute for a buyer. It is a substitute for time. Where there is no buyer, there is no bridge, only a shorter route to the same outcome.
The cost of the bridge against the cost of losing the transaction
The right comparison is almost never the bridge against ordinary long-term funding, because ordinary long-term funding is not available on the timetable in question. The comparison is the bridge against the consequences of failing to complete.
On one side sit the components of the facility: arrangement and commitment economics, the margin over the relevant reference rate, non-utilization and extension fees, exit or prepayment provisions, legal and security perfection costs across each relevant jurisdiction, valuation and monitoring requirements, and the internal management time absorbed by an intensive reporting regime. None of these should be estimated with a single number at the outset; each depends on tenor, security package and jurisdictional spread, and a group that receives a confident total before diligence should treat that confidence as information about the counterparty.
On the other side sit the consequences of missing the date: forfeited deposits, break costs, loss of exclusivity in a competitive process, the expense and delay of returning to market, deterioration in the asset or the counterparty’s position during that interval, and the tax and regulatory cost of unwinding steps that have already been executed. Where a group has incurred structuring, notarial and advisory cost in establishing a platform, the sunk element of that cost is real; the analysis in our note on the cost of a Dutch holding structure applies with equal force to a structure abandoned mid-implementation.
Where the second column plainly exceeds the first, the bridge is rational even at demanding pricing. Where the two are of comparable magnitude, the transaction was probably marginal before financing was contemplated, and the financing will not rescue it.
Where the borrowing sits
The location of the borrower within the group is not a presentational matter. Interest is deductible where there is fiscal income to shelter, and the Dutch earnings stripping rule restricts net interest to a percentage of fiscal EBITDA subject to a minimum threshold, with parameters that have been adjusted more than once since introduction. Under article 15b of the Dutch Corporate Income Tax Act 1969, the net interest balance is deductible for 2026 up to the higher of 24.5 per cent of adjusted profit and EUR 1,000,000, after the percentage moved from 30 to 20 and then to 24.5 per cent, and the interest expense it counts includes costs in respect of loans, not only the stated interest. Interest disallowed in one year carries forward and is deducted in a later year to the extent that year’s own net interest stays below the cap, although under article 15ba a balance carried forward can be forfeited when the ultimate ownership of the borrower changes significantly. A holding entity with limited operating income and net interest above that threshold may therefore obtain little benefit from interest arising at its level, a point developed in our discussion of the interest deduction limits under ATAD. Financing costs connected to a participation covered by the participation exemption raise their own questions, and the exemption is obligatory and in principle symmetrical, with exceptions such as the separate liquidation loss rule of article 13d, so the treatment of the underlying holding cannot be selected to suit the funding. Article 13(1) of the same Act excludes from profit both the benefits of a participation and the costs of acquiring or disposing of it, while, as the explanatory memorandum to that provision states, financing costs relating to the participation are deductible, subject among other things to the interest limitation rules.
Where the bridge is provided intragroup, or where an external bridge is on-lent within the group, article 8b applies without threshold: terms must be at arm’s length, and under its third paragraph the entity’s administration must show how the terms were set and whether independent parties would have agreed them. Interest paid to associated entities in low-taxed or listed jurisdictions falls, on the conditions and alongside the other cases set out in article 2.1 of the Wet bronbelasting 2021, within the scope of the conditional withholding regime in force since 2021, and short duration provides no shelter from it. The taxable base in article 3.3 of the Wet bronbelasting 2021 is compensation of any kind on the loan, costs included, and a low-taxed jurisdiction is a state designated by ministerial regulation because it does not tax entity profits or taxes them at a rate below 9 per cent, or because it appears on the EU list of non-cooperative jurisdictions. Cross-border arrangements should also be assessed against the DAC6 hallmarks at the point of design rather than after implementation, since the reporting obligation falls on the intermediaries involved, passes to another notified intermediary or to the taxpayer where there is no intermediary or a legal professional privilege waiver applies, and the 30-day filing windows in article 8ab of Directive 2011/16/EU can open before the first implementation step.
Governance and the failure case
A bridge concentrates decision-making into a short window, which is precisely when governance tends to be weakest. Directors of the borrowing entity owe their duties to that entity, and a facility that is comfortable at group level may be uncomfortable at the level of the company that signs it. Board minutes should record the exit relied upon, the evidence supporting it, and the consequences considered if it does not arrive. Where the borrower sits in a Dutch platform, the allocation of authority between management and shareholder becomes operationally significant under time pressure. For a Dutch BV, article 2:239 of the Civil Code directs the board to the interest of the company and its connected enterprise, and where the articles of association oblige it to follow another body’s instructions, it must do so unless they conflict with that interest, so a shareholder instruction to sign does not by itself settle the question.
The security package deserves the same attention. Cross-default provisions, share pledges over intermediate holding entities and negative pledges can propagate a local problem through an entire structure. A bridge that fails should be capable of failing in one place.
When to decline
There are circumstances in which the correct answer is that the transaction does not proceed on this timetable. If the exit cannot be described in a paragraph naming a counterparty, a document and a date, the facility is not transitional. If repayment requires a change in market conditions, it is not a bridge. If the borrower cannot service the facility from existing cash flow for a period materially longer than the expected term, the margin for error is insufficient.
The alternatives are usually less elegant and more durable: additional equity, deferred consideration, seller financing, an extension negotiated with the counterparty, or a decision not to complete. Groups that reserve bridge finance for genuine timing gaps find it a precise and unremarkable instrument. Groups that use it as a source of general liquidity discover that it was never designed to be one.
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This article is informational and does not constitute tax, legal or investment advice. Each engagement is subject to scope and applicable regulation.