Read the following Case Study and answer the question.

Aryan is a CEO of RS Infotech Ltd., which is a company working in the technology sector for the last 55 years. The company is doing very well in this sector and now has a growth plan of entering into cosmetics market.

Keeping in view the changing tastes and preferences Of customers, it is planning to enter organic products market.

The company targets to achieve 20% of market share in the first 2 years of its entry.

For financial issues, Aryan consulted his chief finance officer, Raj and found that it requires 50 crores of additional capital for setting up a separate cosmetics division.

The Company plans to arrange this money by issuing equity shares in the market but it lacks sufficient cash to bear the floatation cost and hence planned to approach the financial market for the same.

When the company approaches Money Market to meet the requirement of floatation cost of equity shares, the process is known as ____________.

Bridge Financing

The correct answer is option 3- Bridge Financing.

When the company approaches Money Market to meet the requirement of floatation cost of equity shares, the process is known as Bridge Financing.

Bridge financing is a short-term financing option that helps businesses to meet their immediate financial requirements.

Commercial paper is a short-term unsecured promissory note, negotiable and transferable by endorsement and delivery with a fixed maturity period. It is issued by large and creditworthy companies to raise short-term funds at lower rates of interest than market rates. It usually has a maturity period of 15 days to one year. The issuance of commercial paper is an alternative to bank borrowing for large companies that are generally considered to be financially strong. It is sold at a discount and redeemed at par. The original purpose of commercial paper was to provide short-terms funds for seasonal and working capital needs. For example companies use this instrument for purposes such as bridge financing.
Example: Suppose a company needs long-term finance to buy some machinery. In order to raise the long term funds in the capital market the company will have to incur floatation costs (costs associated with floating of an issue are brokerage, commission, printing of applications and advertising, etc.). Funds raised through commercial paper are used to meet the floatation costs. This is known as Bridge Financing.