What is Bridge Finance ?
Often, Bridge Finance is a form a Loan (Bridge Loan) as short term finance option used by many companies and entities to solidify their position until a long-term finance option is arranged. This type of Finance, Bridging Finance, normally comes from an investment bank or a venture capital firm, which issues the loan or equity investment.
Bridge Finance exists in order to “Bridges” gaps between a company/business’s money is about to run out and they are expected to receive an injection of Funds at a later stage. This financing is normally used the most to fulfil a company/business’s short-term, capital needs.
This type of financing cal also be used for Initial Public Offerings (IPO) or may include an equity-for-capital exchange instead of a loan.
- Bridge financing can take the form of debt or equity, and can be used during an IPO.
- Bridge loans are typically short-term in nature and involve high interest.
- Equity bridge financing requires giving up a stake in the company in exchange for financing.
- IPO bridge financing is used by companies going public. The financing covers the IPO costs and then is paid off when the company goes public.
– How Does Bridge Financing Works ?
There are multiple ways to arrange a Bridge Financing Loan. Which option you will choose, it will depend a lot on availability to the company or entity. What we mean by this is, if a company is in relatively solid position that may need some short-term help will have more options than a company facing more distress or in a relatively less solid position.
Bridge Financing Options can include Debt, Equity, and IPO Bridge Financing.
– Debt Bridge Financing:
One option company’s can use Bridge Financing is to take out a short-term, high-interest loan, known as a Bridge Loan. Business/Company’s who take out Bridge Loans need to be somewhat careful, because however, interest rates can most times be so high that it causes further Financial struggles.
For example, if a company/business/entity was already approved for a AED500,000 GBP Bank Loan, but the loan is broken into tranches, with the first tranche set to come in six months, the company may seek a bridge loan. It can apply for a six-month short-term loan that gives it just enough money to survive until the first tranche hits the company’s bank account.
– Equity Bridge Financing:
Most times, company’s don’t want to be in debt with high interest rates for obvious reasons. This being the case, company’s can seek out venture capital firms to provide a Bridge Financing round and thus provide the company with capital until it can raise a larger round of equity financing (if desired).
In this cases, the company may choose to offer the venture capital firm equity ownership in exchange for several months to a year’s worth of financing. The venture capital firm will complete such deals if they believe the company will ultimately become profitable, which will see their stake in the company increase in value.
– Bridge Financing During an IPO:
Bridge Financing, in investment terms, is the method of financing used by companies before their Initial Public Offering (IPO). These type of Bridging Finance are designed to cover expenses associated with the IPO and is normally short-term in nature. Once the IPO in concluded, the cash raised from the offering immediately pays off the loan liability for the company.
The funds are usually supplied by the investment firm underwriting the new issues. As payment, the company acquiring 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, in essence, a forwarded payment for the future sale of the new issue.
– Example of Bridge Financing:
It is quite common across many different industries since there are always struggling companies and entities. For example the Mining sector is full of small companies which use Bridge Financing to develop a mine or to cover the costs until they can issue more shares – a common way of raising funds in the sector.
Bridging Finance is not straightforward most times, it often includes many provisions to help protect the entity providing the funds, however with Bijoux Financier LLC, the process can be simple and only a few working days.
A mining company may secure $12 million in funding in order to develop a new mine which is expected to produce more profit than the loan amount. A venture capital firm may provide the funding, but because of the risks the venture capital firm charges 20% per year and requires that the funds be paid back in one year.
The term sheet of the loan may also include other provisions. These may include an increase in the interest rate if the loan is not repaid on time. It may increase to 25%, for example.
The venture capital firm may also implement a convertibility clause. This means they can convert a certain amount of the loan into equity, at an agreed-upon stock price, if the venture capital firm decides to do so. For example, $4 million of the $12 million loan may be converted into equity at $5 per share at the discretion of the venture capital firm. The $5 price tag may be negotiated or it may simply be the price of the company’s shares at the time the deal is struck.
Other terms may include mandatory and immediate repayment if the company gets additional funding that exceeds the outstanding balance of the loan.