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Bridge Financing

Bridge Financing
BusinessCorporate Finance and AccountingDebtCorporate Debt

What Is Bridge Financing?

Bridge financing, frequently as a bridge loan, is an interim financing option utilized by companies and different elements to harden their short-term position until a long-term financing option can be sorted out. Bridge financing typically comes from an investment bank or venture capital firm as a loan or equity investment.

Bridge financing is likewise utilized for initial public offerings (IPO) or may incorporate an equity-for-capital exchange rather than a loan.

How Bridge Financing Works

Bridge financing "bridges" the gap between when a company's money is set to run out and when it can hope to receive an imbuement of funds later on. This type of financing is most typically used to satisfy a company's short-term working capital needs.

There are various ways that bridge financing can be sorted out. Which option a firm or entity uses will rely upon the options accessible to them. A company in a somewhat strong position that needs a bit of short-term help might have a bigger number of options than a company facing greater distress. Bridge financing options incorporate debt, equity, and IPO bridge financing.

Types of Bridge Financing

Debt Bridge Financing

One option with bridge financing is for a company to take out a short-term, high-interest loan, known as a bridge loan. Companies who look for bridge financing through a bridge loan should be careful, nonetheless, in light of the fact that the interest rates are in some cases so high that it can create additional financial battles.

If, for instance, a company is as of now approved for a $500,000 bank loan, yet the loan is broken into tranches, with the first tranche set to come in quite a while, the company might look for a bridge loan. It can apply for a six-month short-term loan that gives it just enough money to make due until the primary tranche hits the company's bank account.

Equity Bridge Financing

Now and again companies would rather not cause debt with high interest. If so, they can search out venture capital firms to give a bridge financing round and consequently furnish the company with capital until it can raise a bigger round of equity financing (whenever wanted).

In this scenario, the company might decide to offer the venture capital firm equity ownership in exchange for quite some time to a year's worth of financing. The venture capital firm will take such a deal in the event that they accept the company will at last become profitable, which will see its stake in the company increase in value.

IPO Bridge Financing

Bridge financing, in investment banking terms, is a method of financing utilized by companies before their IPO. This type of bridge financing is intended to cover expenses associated with the IPO and is commonly short term in nature. When the IPO is complete, the cash raised from the offering immediately takes care of the loan liability.

These funds are generally supplied by the investment bank underwriting the new issue. As payment, the company obtaining the bridge financing will give a number of shares to the underwriters at a discount on the issue price which offsets the loan. This financing is, generally, a sent payment for the future sale of the new issue.

Illustration of Bridge Financing

Bridge financing is very common in numerous industries since there are continuously striving companies. The mining sector is filled with small players who frequently use bridge financing to foster a mine or to cover costs until they can issue more shares — a common approach to bringing funds up in the sector.

Bridge financing is rarely clear, and will frequently incorporate a number of provisions that assist with safeguarding the entity giving the financing.

A mining company might secure $12 million in funding to foster another mine as most would consider to be normal to create more profit than the loan amount. A venture capital firm might give the funding, but since of the risks the venture capital firm charges 20% each year and expects that the funds be paid back in one year.

The term sheet of the loan may likewise incorporate different provisions. These may remember an increase for the interest rate in the event that the loan isn't repaid on time. It might increase to 25%, for instance.

The venture capital firm may likewise carry out a convertibility clause. This means that they can change over a certain amount of the loan into equity, at a settled upon stock price, assuming that the venture capital firm chooses to do as such. For instance, $4 million of the $12-million loan might be changed over into equity at $5 per share at the tact of the venture capital firm. The $5 price tag might be negotiated or it might just be the price of the company's shares at the time the deal is struck.

Different terms might incorporate mandatory and immediate repayment assuming the company gets extra funding that surpasses the outstanding balance of the loan.

Highlights

  • IPO bridge financing is utilized by companies opening up to the world. The financing covers the IPO costs and afterward is paid off when the company opens up to the world.
  • Bridge loans are commonly short-term in nature and include high interest.
  • Bridge financing can appear as debt or equity and can be utilized during an IPO.
  • Equity bridge financing requires surrendering a stake in the company in exchange for financing.