Bridge Loan

The term Bridge Loan is used to describe the type of funding a company receives when it needs to "bridge" the period of time needed to obtain a larger amount of funding. Usually the larger follow-on funding comes from another investor, not usually the same investor that provided the bridge funding. Also, the terms for each funding are structured differently. The bridge loan is frequently structured as a short term promissory note with a high interest rate. The investor or lender, also typically receives a small number of shares of stock or warrants in the companies as an equity kicker. The loan is then paid off in full once the larger funding transaction closes.

A Special Situations Fund or other specialty investor will usually help a company in need of bridge loan funding. These types of funding transactions have become very popular over the years with hedge fundshedge funds, assuming that there is a solid subsequent funding source in place. The financing can be used for any number of reasons, such as acquisition funding, purchasing equipment accounts receivable financing and more.

Some investors specialize in providing bridge funding. They can even introduce a company to a larger investor or brokerage firm that they partner with who can help the company structure and line-up the larger subsequent financing, whether it is debt, equity or an asset based loan.

Make sure your management team is thinking ahead and has the subsequent financing round in place otherwise you will not be able to attract a bridge loan funding-source. Although there are no guarantees that the subsequent funding round will close on time, try to limit the guess work. The two funding sources you are negotiating with (the bridge investor and subsequent round funder) are likely going to talk with each other to make sure both are board with the structure of the funding each will be providing. They are going to want to know the terms of their respective funding transactions. Also, equally as important, they will want to know the timing of those funding transactions. The bridge funder wants to limit his risk as much as possible, he wants to make sure the subsequent funding round is in place and will close quickly so that he limits his risk. The less contingencies to the subsequent funding closing on time or at all the better.

Always look for a bridge loan funder that can help you with subsequent financing rounds because this way both funding sources will be comfortable with each others investment positions. It is always best to find a good financing partner that is well-experienced when it comes to corporate funding transactions. Private investors tend not to be that knowledgeable with these types of transactions. Look for an investor that can either provide you with funding for subsequent rounds or can get you that second and third round of funding through relationships it has with partners or affiliates, otherwise your management team may have the unfortunate task of having to start the process all over again.

Building important relationships with investors, hedge funds, auditing firms and other professionals is important. It can sometimes take more time and effort raising capital than running the business itself. Give me a call if you have any questions.

If you are looking for information on commercial real estate bridge loans not related to corporate funding you might want to visit www.avatarfinancial.com/ which is considered a hard money lender.