Definition of Bridge Financing
Bridge financing is an approach to financing that’s designed to help to bridge the gap between where a company is now and where it wants to be in the future. This is where it gets its name from.
There are different bridge financing options out there, with one of the most common of them being a loan from a bank or a venture capital firm. They can also sell part of the company for shares as part of an equity investment.
For it to be true bridge financing, it should be short term in nature, and this often means that you’ll be expected to pay a large amount of interest.
A classic example of bridge financing comes to us via the mining industry, where companies would often use bridge financing to help them to continue work at a mine until they were able to witness a return on investment.
Due to the myriad different factors at play, it’s not uncommon for bridge financing to include a number of provisions that outline what will happen if the company is unable to repay its debts. For example, the interest rate may be increased if the loan isn’t paid back on time.
If the money is being provided by a venture capital firm, they may also include a provision which states that they can convert part of the loan into shares at a predetermined price. They may also include a clause that specifies that the company has to immediately pay them back if they take on additional investment from anywhere else.
Can bridge financing be used for IPOs?
Yes! In fact, bridge financing is often used for initial public offering (IPOs). In these cases, the financing is designed to cover the costs of the IPO, and the finance can be repaid as soon as the company has gone public.
What are the most common types of bridge financing?
The most commonly seen types of bridge financing are the following:
- Debt bridge financing: Designed to provide companies with a short-term loan to help them to deal with debt. However, the high interest rates that are associated with debt bridge financing can lead to it providing the company with additional problems in the future.
- Equity bridge financing: This type of financing is designed for companies that don’t want to take on a debt. Instead of borrowing money, the company can offer an investor equity/ownership in the company in exchange for a predetermined amount of money.
- IPO bridge financing: This is a type of bridge financing that’s designed to help companies to cover the costs that are associated with an initial public offering (IPO).
How high is the interest rate for bridge financing?
Interest rates for bridge financing vary from organization to organization, but they’re generally much higher than the interest rates on a regular loan. It’s typical to see an interest rate of somewhere between 10-20%, and the company is usually also responsible for any associated processing fees.