Bridge Funding: Staying Afloat Until Long-Term Money Arrives
Bridge funding, also called bridge financing, is a form of financing used by companies and other entities to stabilize their short-term position until a long-term funding option can be arranged. It usually comes from an investment bank or venture capital firm, in a loan or equity investment. It is also used for initial public offerings, or may include an equity-for-capital exchange instead of a loan. This type of financing is used to fulfill a company's short-term working capital needs.
The name came from the loan acting as a bridge between funding options. It permits a business owner to stay afloat financially while working to secure a different, more lasting form of funding. These methods bridge the time frame when the business is experiencing a cash crisis and is working toward getting capital from long-term funding options.
There are three types. Debt bridge funding is a short-term, high-interest loan known as a bridge loan. Companies who seek it need to be careful and understand the funding options, because the interest rates are sometimes so high that they can cause other financial struggles. IPO bridge funding is designed to cover expenses associated with the Initial Public Offering and is typically short term in nature. Equity bridge funding is used when companies do not want to incur high-interest debts; it is provided through investors, with equity granted over the business. This route needs to be considered carefully to avoid giving the investors total control of your business.
The advantages: the submission, processing, approval and funding process for bridge loans is typically much faster than for bank-issued loans. Bridge funding can cover upfront expenses while waiting for payment, as long as there is collateral that is almost worth the fund. And a short-term funding solution can be the financial help needed to maintain as much control of your business as possible when it is urgent.
The disadvantages: the terms are always short for the return of funds, generally ranging from 3 to 18 months, so larger monthly payments may be needed compared to other business financing products. It could lead to a significant debt-to-income ratio if mismanaged, or to a vast, unexpected expense. And there are higher interest rates compared to traditional or bank-issued loans.