A short-term loan given to investors to fulfill funds in start-up businesses, bridge loans provide much-needed financial support. Essentially, the loan is intended to “bridge” the gap investors face when generating new investments, to help them avoid potential business fallout, or rectify one.
Bridge loans can be secured by both stable and wavering startups. For steady investors, bridge financing can be used to capture new value by extending a runway past a certain valuation point. For struggling investors, bridge financing can balance and extend the life of their startup, especially if the future of the business is unknown.
Whether their case is dire or stable, investors need to be informed of what exactly bridge loans are, and how they work to help them.
Bringing The Boom Back
Startups employ bridge loans to cover a significant stage of funding. For example, the financing they receive can be used to get to funding for a venture capital round or the sale of the company.
The venture capital in bridge loans is not generally expected to be paid back with dollars, but with conversion to company stock at maturity, in other words, as convertible debt. The common loan elements of interest and principal apply to bridge loans, along with other agreements such as discounts, warrants, and valuation caps.
The initial loan investor receives a consigned promissory note, which documents their bridge investment. In this statement, the startup (the owner borrowing the loan) guarantees repayment to the lenders, often plus interest.
What makes this type of financing appealing is the ease of negotiating terms. Savvy entrepreneurs can opt to discuss and agree on the terms of their bridge loan rather than determining the value of their startup and the risk on an investor’s equity.
In short, a bridge loan can help business owners achieve sustainability when their current deal falls through without another one in the foreseeable future.
Other benefits of a bridge loan include:
Increase A Company’ Value
Even if a startup is expanding well, investors can opt for a bridge loan to contribute the funds for that next round of expansion and growth, thus promising future profits.
Launch A Startup
Investors don’t have to be in the midst of a startup to get bridge loans. This financing helps professionals get a startup off the ground by funding it at its ‘seed’ stage.
With extensive experience in commercial lending, Gregg Marcus helps entrepreneurs secure bridge loans with flexible terms. If you want more information, contact Gregg Marcus to schedule an appointment.