Legal Definitions - link financing

Link financing refers to a financial arrangement where one loan or funding source is directly connected to or contingent upon another. It often involves using a short-term financial instrument to bridge a temporary funding gap, with the explicit plan that this initial financing will be repaid or replaced by a more permanent, long-term financing solution once certain conditions are met or a future event occurs. Essentially, it "links" two distinct stages of financing, with the later stage intended to resolve the earlier one.

• Example 1: Real Estate Development

  A real estate developer identifies a prime piece of land for a new residential complex and needs to purchase it quickly to secure the deal. They obtain a short-term "bridge loan" from a bank to cover the land acquisition cost. The terms of this bridge loan explicitly state that it will be repaid in full from the proceeds of a larger, long-term construction loan that the developer plans to secure once all necessary building permits are approved and pre-sales for the units begin.

  This illustrates link financing because the initial bridge loan is directly linked to and dependent on the future construction loan for its repayment. The bridge loan serves as a temporary financial solution until the more permanent construction financing is in place.

• Example 2: Business Acquisition

  A growing technology company decides to acquire a smaller competitor to expand its market share. To complete the acquisition swiftly, the company secures a short-term acquisition loan from an investment firm. The plan is to integrate the acquired company's assets and operations, and then, within six months, secure a larger, long-term venture capital investment or a traditional bank loan, using the combined entity's enhanced value as collateral, to pay off the initial acquisition loan.

  Here, the short-term acquisition loan is a form of link financing because its repayment is contingent upon and linked to the successful securing of a subsequent, more substantial long-term financing round (either venture capital or a bank loan).

• Example 3: Municipal Infrastructure Project

  A city council approves a major public works project, such as the renovation of its downtown waterfront. To initiate the project promptly and cover initial design, engineering, and demolition costs, the city issues short-term municipal notes. The city's financial strategy clearly outlines that these notes will be refinanced and repaid by the proceeds from long-term municipal bonds, which will be issued once the project is well underway and its economic benefits are clearer, making the long-term bonds more attractive to investors.

  This is an example of link financing because the short-term municipal notes provide immediate capital but are explicitly linked to and intended to be repaid by the future issuance of long-term municipal bonds, which represent the permanent funding for the project.