Bridge Loan Funding

Bridge Loan Funding refers to the kind of funding required by a company for a short period of time, usually less than six months. The loan is typically made to the company by one investor and the use of capital is for a specific purpose that the parties agree upon in advance. For instance, a larger investor may be in the process of funding several million dollars, but that funding process may take a month or more to close the transaction. In the meantime, the company needs a short term loan or “bridge” to purchase inventory or equipment.

An example of bridge loan financing would be a transaction in which an investor provides some form of short term bridge loan financing to fund say $100,000 or more to meet a company's needs while the company is in the process of working on documentation and finalizing the terms of a larger funding.

Investors that provide the bridge financing are theoretically taking more risk, because the larger financing may not end up closing for reasons outside of the company’s control. Therefore, bridge investors usually get very good terms on the financing that they provide. These terms usually include a high interest rate which is two or three percentage points above the going market rate. Also, the investor will get some sort of equity kicker in the form of warrants and/or common stock. The equity kicker will apply even if the company is private with no present intention of going public. The more risk in the transaction to the investor the more equity the company will be required to give up in order to close the funding.

The larger investor if and when it closes on its funding may simply payoff the bridge loan funding to get it out of the way, but the bridge loan investor will get to keep the equity kicker piece. Sometimes the larger investor doesn't pay off the bridge loan, especially if the larger investor knows the other investor and doesn't feel bridge loan will interfere with the larger funding.

Locating investor sources for bridge loan funding can be tricky. You have to build a network of funding sources or contact someone who already has established investor sources that you can work with and save needed time. Raising capital and building such a network is an art and takes time to build investor relationships, which is why brokerage firms and investment bankers charge considerable fees for those contacts, not to mention the time and effort they will have to put in to hopefully close the deal.
Here are some additional tips and information on bridge loan funding that you might find helpful.