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 funding 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. Sometimes an investor will provide the bridge loan while an equity line funding is being established for a three year funding commitment with the same investor. Here is some information on contacting bridge loan funding investors that you might find helpful. Bridge Loan Funding can be a very important tool in helping a company grow and achieve its goals. Many companies need that investment capital to grow or at least grow faster. If used correctly, a bridge loan can help a couple achieve significant growth or close close on an acquisition or other transaction that provides significant growth or the ability to capture a larger market share for its product or service. Investors that provide the bridge financing are theoretically taking more risk, because the larger financing may take longer to close for reasons outside of the company’s control, or it might not happen at all because of changed circumstances or the other investor or lender backing out. Therefore, bridge investors usually get very good terms on the financing that they provide. If the bridge funding is being made in exchange for equity such as common stock or preferred stock, then the investor will typically look for something like a forty percent (40%) discount from the current trading price of the company's common stock. This is required to protect the investor based on the amount of risk the investor is taking in the transaction. Factors that are considered in determining the size of the discount include the company's financial statements, EBITDA, net profit, trading price, stock price volatility, technical analysis of the stocks trading history and other fundamentals. If the bridge funding is being made as a debt investment then the investor will look for a high interest rate and some form of equity kicker. The equity kicker can be in the form of common stock or warrants with a three to five year term. The interest rate is usually several percentage points above the going market rate and the bridge lender. Even if the company is currently a private company the investor will get some sort of equity kicker in warrants and/or common stock. 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.
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