TL;DR
Bridge financing, also known as a bridge loan or interim financing, is a short-term funding option designed to provide immediate capital to a company.
This type of financing is typically used to “bridge” the gap between two significant funding rounds or to cover short-term expenses while waiting for longer-term financing to be secured.
Bridge financing can come in various forms, including:
- Loans
- Convertible notes
- Equity investments
And more.
How Does Bridge Financing Work?
Bridge financing is usually structured to be repaid within a short period, often six to twelve months.
The terms and conditions of bridge financing can vary depending on the lender or investor, the company’s financial situation, and the anticipated future funding events.
Here are the common forms of bridge financing:
Convertible Notes
Convertible notes are a popular form of bridge financing where the investor loans money to the startup with the expectation that the loan will convert into equity during the next funding round.
The conversion typically happens at a discount to the future round’s valuation, providing an incentive for the investor.
Equity Investment
In some cases, investors may provide bridge financing in exchange for equity in the company. This form of financing can dilute existing shareholders but provides immediate capital without the need for repayment.
Short-Term Loans
Bridge financing can also take the form of short-term loans from banks or private lenders. These loans usually come with higher interest rates due to their short-term nature and the higher risk involved.
Benefits of Bridge Financing
Immediate Access to Capital
One of the primary advantages of bridge financing is the quick access to capital it provides. This immediacy can be crucial for startups needing to cover operating expenses, payroll, or other urgent financial needs.
Business Continuity
Bridge financing helps maintain business continuity during periods of uncertainty or while awaiting longer-term funding.
It ensures that the company can continue its operations, meet its obligations, and pursue growth opportunities without interruption.
Flexibility
Bridge financing offers flexibility in terms of structure and repayment.
Depending on the company’s needs and the investor’s preferences, bridge financing can be tailored to include convertible notes, equity investments, or short-term loans.
Strategic Positioning
For startups on the verge of a major funding round, bridge financing can provide the necessary runway to:
- Reach important milestones
- Improve their valuation
- Negotiate better terms with future investors
Among others.
Considerations and Risks
Cost
Bridge financing can be expensive due to high-interest rates or the potential for significant equity dilution. Startups need to carefully consider the cost of this financing option and weigh it against the benefits.
Repayment Pressure
With short repayment terms, bridge financing can create pressure on the startup to secure additional funding quickly.
Failure to do so can lead to financial strain and potential difficulties in meeting repayment obligations.
Investor Alignment
When seeking bridge financing from investors, it’s important to ensure alignment with the company’s long-term goals.
Investors providing bridge financing may seek specific terms or conditions that could impact the company’s future financing strategy and ownership structure.
Conclusion
In a nutshell, bridge financing provides immediate capital, ensures business continuity, and offers flexibility in structuring repayment terms.
Interested in learning more VC related terms? Head over to our VC glossary!