What Is Bridge Financing?
Bridge financing gets you through those times when you have been approved for financing and are waiting for the money to arrive.
Imagine that even after small business loan approval from the bank, the first installment will not arrive for another six months. In the meantime, you need to cover your operating costs and move forward with a time-sensitive investment purchase that will strengthen the performance of your business.
This short-term funding solution can serve as a bridge that connects you to immediate capital through a short-term lending solution. Keep reading to see why the potential improvement in revenue performance makes the cost of financing worthwhile.
How Does It Work?
There are two primary mechanisms through which bridge financing takes place: bridge loans and equity financing. If you are about to go public, you might choose IPO bridge financing to assist you with the upfront costs associated with a public offering. IPO financing usually comes from a venture capital firm or investment bank.
Bridge Financing With Debt
You have been approved for a $1 million small business loan to cover a gap in your cash flow, but the first installment is a few months away. You need the cash now, so you apply for a bridge loan. The interest rates are higher than a business loan with bad credit, but the expediency of the process might be worthwhile.
An excellent example is the bridge loans being distributed in Austin, Texas. The city is offering loans to small businesses for a maximum amount of $35,000 to bridge the gap until federal coronavirus assistance funds arrive. Accordingly, the city’s small businesses can remain afloat. Once they receive PPP or other CARES Act assistance, they can readily repay the city’s bridge loan.
Bridge Financing With Equity
You need to purchase new facilities for your business operations. You have made an offer on a suitable property and need to close the deal before it goes back on the market, or, the seller raises the price. You cannot afford to wait for the bank money to come through.
If you would rather not deal with the high-interest rate of a bridge loan, you can solicit investors to purchase equity in your business. You offer investors shares in your business in exchange for an immediate infusion of cash that you can use to close the deal. You need to convince the investors that the purchase of this real estate will dramatically increase your profits and solidify your footprint in the marketplace.
Bridge Financing For IPO
Taking your business public is an enormous step that, while demonstrating your success, also takes a chunk out of your operating budget. If you were planning to go public today, you might be facing the additional challenges of the coronavirus pandemic. Attracting capital from traditional sources has become much harder. A short-term solution is to apply for IPO financing.
Once your IPO is complete, you can immediately repay the financing with proceeds from the share sale. Typically, a company secures financing from the IPO underwriter. The business gives a certain number of shares to the underwriters at a discounted price, thus partially offsetting the loan.
Bridge Financing In Action
Bridge financing empowers you to move forward with strategic investments that lead to long-term improvement in a business’s financial health. With this financing, you keep working capital and cash reserves free until anticipated revenue arrives.
Consider these working examples:
- A medical equipment company raised $2 million in equity financing from its existing shareholders. Bridge financing was needed because a more substantial funding round projected to raise $10 million had to be postponed. The company was working to bring in a strategic partner and the discussions were taking more time than anticipated. Once the company closed with its strategic partner, it expected to receive millions of dollars in addition to technological and marketing support.
- The SBA Express Bridge Loan (EBL) Pilot Program is an example of bridge financing that is not dependent on the arrival of other loan funds. The EBL program was created to help small businesses survive economic turmoil caused by disasters, including COVID-19. These loan packages are small, no more than $25,000, and require no collateral. A small business that receives a bridge loan through this program may be required to repay it if the business subsequently receives long-term disaster assistance.
Bridge financing is a business-saving mechanism when cash flow is stuck. Whether you have been approved for a bank loan but have not received funds yet, you need to move quickly on an investment purchase, or are ready to take your company public, this unique financing covers cash gaps while enabling you to meet your strategic objectives.