Skip to content

Financing Options: Bridge Loans

August 16, 2011

Financing Options: Bridge Loans: “

Today’s post in the financing options series on MBA Mondays is about Bridge Loans. Bridge loans are so called because they are a “bridge” to something else. They are short term loans intended to fund a company to an anticipated event in the future.

Bridge loans exist in many sectors outside of the startup world. Big banks will often bridge companies to transactions they are putting together for them. Real estate transactions are often bridged to a closing. The concept of short term transaction driven loans is universal in business.

In the startup world, bridge loans are a particularly interesting case to study. I’ve been in and around startups for 25 years now and I have rarely seen a bridge loan made by anyone other than an existing investor or investor group. Most bridge loans in the startup world are made to money losing companies that are going to run out of funds before they can close a financing or sale transaction. These are very risky loans that will not get paid back unless a transaction happens and often the transactions that are required don’t happen.

If you could assemble a data dump of all bridge loans made by VCs and angel investors to startups over the past twenty five years, I think you’d see that the aggregate performance of these bridge loans would be awful. I’m certain that the performance of bridge loans made by firms I’ve been associated with in that time is hugely negative. The loss rate is very high and the returns on the ones that work are not much better than a typical venture investment.

So why do VCs and angels make bridge loans when they perform so poorly? There are two reasons, and they are related but they are not the same. First, investors like to give the companies and teams they have backed a chance at success. Contrary to the popular view, VCs and angels are supportive of their portfolio companies well beyond what a hard nosed rational investor would be. I have seen startup investors make follow on investments many times that make no sense other than on a “doing the right thing” basis. Second, many investors are playing defense with these loans. They know they’ve made a weak or outright bad investment but they don’t want to acknowledge it with a writeoff, so they keep putting in good money after bad.

So bridge loans are often bad investments made defensively. And so they are red flags to other investors. When a new investor looks at a company and sees a bridge loan in place, they will understand that all is not well. This doesn’t mean you shouldn’t make or receive a bridge loan. It just means you will need to explain it. And it will make closing a financing more challenging.

Bridge loans made in anticipation of a sale are a bit different. There is a really strong rationale for making a bridge loan in anticipation of a sale. The investors know that a sale is coming so a priced equity round doesn’t make much sense. The company can’t sell equity cheap relative to what the expected sale price will be. And if the equity is priced close to the expected sale price, then there will not be an equity return when the sale closes. So a loan makes the most sense. And bridge loans are the best kinds of loans to do in this situation. An acquirer will not be terribly surprised to see a bridge loan in place when they look at the books and thus it is not nearly the same kind of red flag as it is in an equity financing.

When making a bridge loan, it is critical that the size of the loan be sufficient to get to the transaction you are bridging to. The bridge metaphor is a good one. You want the bridge to be long enough to cross the river. Otherwise it does no good. Getting a second bridge done is always very hard. So if you think you need three months to sell the company or get a fiancing done, get six months of burn in your bridge.

The biggest concern investors will have in making a bridge is the probability of a tranaction closing. Investors will not make a “bridge to nowhere.” So before you can realistically ask for a bridge, you must build a strong case for the transaction you want the investors to bridge to. Getting a banker or an advisor hired to help you secure the transaction you want is one good way to give investors comfort in making a bridge. It doesn’t guarantee that you will get a deal done, but it shows everyone that you are committed to making it happen.

The terms of bridge loans are pretty standard. The loan will be secured by all the assets of the business that can be pledged. If there is existing bank debt or equipment financing, the bridge will be subordinate to those loans. And you will need the bank’s cooperation getting a bridge done if there is a bank involved. Sometimes that is not easy.

The loan will carry an interest rate of between 6% and 12% depending on the current rate environment and will have warrant coverage or a discount. We covered the concepts of warrant coverage and discounts in the convertible debt post earlier in this series. Bridge loans are a specialized form of convertible debt.

In summary, bridge loans are common in all businesses. In the startup world they are often a sign of distress and for that reason you should try to avoid them if you can. But when you are sinking, any lifeline looks good and bridge loans are no different. Beggars can’t be choosers. In a sale process, bridge loans are less problematic and are often the right solution to financing a company to a sale transaction. For startup investors, bridge loans in the aggregate are a poor performing investment and as an industry, we dislike making them. But like all of the tools at our disposal in the statup world, bridge loans are a reality of our lives, we will all experience them from time to time, and they can be a useful form of financing at a critical time in the life of a company.

(Via A VC.)

28 Comments leave one →
  1. July 18, 2014 7:00 pm

    To ensure approval should be within 40% of your total income.
    Most people who want to start their own business take out a loan on the
    equity in their property, or take out a second mortgage on their house, to get started.
    With their programs in place, business owners
    can then keep track of their finances.

  2. July 23, 2014 6:02 pm

    A recent study by the Silver Promotion Service showed that 46 percent of consumers prefer white metals for diamond jewelry.
    The ‘Red Carpet Collection’ is an ensemble of
    fire and passion and the reds that define the occasion. These shops
    also sell their jewelry in different materials including gold, silver, diamond
    and others.

  3. July 24, 2014 8:07 pm

    Styles that stand out most to me are the necklaces
    with glass beads with different colors mixed with freshwater pearls.
    A: The shape of the freshwater pearl is determined by the nucleation bead.
    Every season, fashionistas are introduced to several new trends worth sprinkling within their wardrobes.

  4. July 25, 2014 9:57 pm

    The beauty of an add a pearl necklace is that the cost can be
    spread out over a period of years. Fine pearls do not have any flaws or spots in the nacre.
    The latter configuration is similar to the layout seen with standard
    piano keys.

  5. July 30, 2014 9:29 pm

    It releases negativity while encouraging self-control.
    The Cover – Girl Eye Enhancers Eye Shadow in Shimmering Onyx is a black eye shadow.

    Lest we forget, this netbook’s RAM is upgradeable to 2GB.

  6. July 30, 2014 9:32 pm

    According to a leading communications strategist the negative economy
    and discord in government has actually changed
    the way we think about tomorrow and communicate with each other.

    Kobo e-reader comparison with its peers suggests that it suits the need for the price conscious customer
    who requires a basic e-book reader and does not have much use for
    the frills offered by competitors. The way mbt outlet are engineered is what creates the changes within you.

  7. July 30, 2014 11:06 pm

    com can be design; it can be made by hand, so the quality of it will very good.

    You can find a great selection of pearl jewelry offered
    at affordable prices at. Every season, fashionistas are introduced
    to several new trends worth sprinkling within their wardrobes.

  8. August 1, 2014 1:16 am

    This was the theme of the Bill Murray movie entitled “The Razor’s Edge. Then consider buying her this elegant replica of Jackie Onassis’s legendary pearl necklace. There is usually a small, or extensive, list of troubleshooting errors when using the Custom layout simply because so much can be altered.

  9. August 1, 2014 7:49 pm

    Most homeowners roll those fees into the mortgage loan rather than having to pay out of pocket, so if you
    are planning to follow this route, ensure you
    account for this amount for your total cash-out.

    With adjustable rate mortgages the initial interest rate is
    usually lower than a fixed-rate mortgage and the monthly payment is also
    lower. The staffs of a second chance loan company are very much willing to listen to you with sympathetic ears.

  10. August 1, 2014 10:31 pm

    It releases negativity while encouraging self-control.
    The Cover – Girl Eye Enhancers Eye Shadow in Shimmering Onyx is a black eye shadow.
    Endings will be open to you depending on who you side with throughout the game.

  11. August 4, 2014 8:26 am

    By putting up the mobile home as equity you will be giving the lender more security, which will
    make it easier for you to get the loan that you desire.
    Visiting the offices on campus provides a chance to check out all of the available options.

    The renovations could even potentially add value to your home.

  12. August 4, 2014 7:54 pm

    In fact, many lenders will want to see “seasoned” accounts, meaning you will need a history about this
    long. On the other hand, at present you do not have to cope with physical calculations due to availability of
    several online mortgage calculators. However, over the years, the loan market of
    numerous developed countries has gradually become very competitive.

  13. August 4, 2014 9:04 pm

    Several use all-natural or perhaps certified organic materials, including fruit, vegetables as well as plant extracts as well as mudThey only cost more
    because they are being sold in the Mikimoto store. If
    you have a senior position at your place of work, make sure that your pearl jewelry is proper
    for the position. She often used pearls to accessorize, and
    the simple strand became one of her trademarks.

  14. August 4, 2014 9:48 pm

    The Chinese have been culturing freshwater blister pearls (pearls that grow underneath the mantle on the inside of the animal’s shell) since the 13th century, but Kokichi Mikimoto, a Japanese
    man, is credited with developing modern pearl culturing techniques.

    Once the glue has dried, use a 600 grit sandpaper to make
    sure that the fretboard is as smooth as possible, and
    that the inlays are flush with the rest of the fingerboard.
    Because they do not contain a starter bead, tissue-nucleated freshwater pearls are 100% nacre.

  15. August 4, 2014 10:19 pm

    Styles that stand out most to me are the necklaces with glass beads with different colors mixed with freshwater pearls.

    Denton is snowbound at the hospital and Sandy
    at home. Beaded jewelry exudes quiet elegance against these striking studded with diamonds or blood red rubies.

  16. August 7, 2014 4:35 pm

    I consider one of my jobs to be educating people about the pitfalls of
    homeownership and debt. Before the 2007 recession, non-citizens frequently took
    out home loans and banks were all too happy to lend to this demographic, because default rates were
    as low as 0. However, it can be a great option to allow you
    to buy a more expensive home and without necessarily having to put down a large down payment.

  17. August 7, 2014 10:57 pm

    Choosing the right kind of loan is especially important when buying a house since a home is often the most important investment a person makes and home mortgages typically have a span of thirty or fifteen years.

    Critics of the Funding for Lending and Help To
    Buy government schemes intended to help young people to buy a home
    say that, in fact, they are simply helping create more private landlords as Buy To Let mortgages become more affordable and easier to
    arrange. This is necessary to determine if the separation from active duty was under other
    than dishonorable conditions.

  18. August 9, 2014 2:44 pm

    The Chinese have been culturing freshwater blister pearls (pearls that grow
    underneath the mantle on the inside of the animal’s shell)
    since the 13th century, but Kokichi Mikimoto, a Japanese man, is credited with developing modern pearl culturing techniques.
    Fine pearls do not have any flaws or spots in the nacre.
    Mikimoto is a brand name, it is not a type of pearl.

  19. August 20, 2014 8:50 am

    But the future — especially as defined by the commercial
    real estate and banking markets — is less than encouraging.
    detailed specifications (the materials and finishes you plan to use).
    As soon the money is returned, the interest stops being levied
    and the account operates normally like before.

  20. August 20, 2014 7:12 pm

    However, it is expected that with confidence in the rising global
    economy, lending growth will recover in 2011 specifically building and
    construction credit. Another question they are going
    to require is if you have property and also the valuation on that land.
    The lender needs to ascertain the likelihood that the borrower will be able to repay the loan.

  21. August 25, 2014 1:14 am

    You will need to inform your mortgage lender whether you are a sole
    proprietor, or incorporated or if you operate under a partnership.
    Some companies will employ someone with just the Ce
    – MAP 1 qualification, although this does vary and many prefer you to
    first have the full Ce – MAP qualification if you
    have no prior experience. Let’s say you inherited
    a $100,000 IRA, and the fact that the money was included in your benefactor’s estate
    added $45,000 to the estate tax bill.

  22. August 25, 2014 1:40 am

    If you’re renting and can’t upgrade right now, or if your current home is all you can afford but it’s not big enough, self storage in Mukilteo can give
    you the room you need for the time being up until you can move to a larger
    place or even decide to downsize your possessions when you have the time.
    Another question they are going to require is if you have property and also the
    valuation on that land. I received a dandy fishing pole
    in a carrying case.

  23. August 25, 2014 3:44 am

    The opportunity to build yourself a new home can be an amazing, once-in-a-lifetime
    chance, so it is important to understand the process
    needed to borrow money to do so through the VA Home Loan Guaranty Program.
    The defining feature of such a loan is that the principal amount borrowed needs
    to be repaid once the construction is completed and the interest charged is paid during the construction process.
    Or the customer is sold on a higher rate during construction with a float down option after the home is built.

  24. August 25, 2014 2:34 pm

    Should you go directly to your local bank or to a loan broker for your loan. Also the
    service is usually very poor and impersonal. The down payment required is somewhere between $1000-5000 down.

  25. August 26, 2014 10:00 pm

    Receive e-mail alerts when new articles from Cezar Mansour the “LA Mortgage Examiner” are available.
    The verification is mainly conducted to make the companies free from any loss
    in respect to their reputation, time and wealth as well as provide a
    healthy working environment to other employees. While the
    historical calculations show that Adjustable Mortgages tend to
    prove more cost-effective over time, the fastened mortgage rate keep United
    States free of anxiety and maintains stability in our payment plans.

  26. August 27, 2014 3:40 pm

    Hence basically, low doc home mortgages erase the complications from applications for
    the self-employed. Therefore, the next step may be to obtaining a home loan pre-approval is to first select
    a home or area that you like. You were going to work for that client indefinitely, with no foreseeable drop or increase in your income.

  27. September 23, 2014 6:46 am

    Usually I do not read post on blogs, but I would like to say that this
    write-up very compelled me to take a look at and do so!
    Your writing style has been amazed me. Thank
    you, quite great article.

  28. November 7, 2014 1:44 pm

    Hi there! I could have sworn I’ve been to your blog
    before but after browsing through some of the articles I realized it’s
    new to me. Regardless, I’m definitely pleased I found it and I’ll be book-marking it and
    checking back often!

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: