What is bridge financing?

What is bridge financing? 

Bridge financing is a financing technique that meets an urgent cash flow need. It is part of a strategy to facilitate access to financing for startups and companies in transition.

This method of financing consists of soliciting a new influx of capital investors in the form of convertible bonds and on preferential terms compared to subsequent investors. 

Bridge financing is not a pre-seed. An entrepreneur can only use bridge financing if investors are already present in the capital of his company.   

There are two categories of bridge financing: 

1. Bridge Loan: It is a short-term credit of a maximum validity of one year, quick to obtain. It is a debt and can come either from a loan or from grants or subsidies. 
2. Equity Bridge: This is financing in the form of equity capital, which functions as a fundraising exercise. The entrepreneur simply asks private investors or the public bank to finance them. One of the major differences, however, is that equity bridge financing is based on the valuation of the previous round or on a discounted valuation of the company. 

What is the purpose of bridge financing? 

The purpose of bridge financing is quite simple: it allows founders and their companies to overcome a financially complicated stage, such as unexpected cost overruns or a delay in growth and development.

The objective of bridge financing is therefore to keep the company alive by covering cash flow needs quickly between two fundraising rounds, for example. 

In short, bridge financing allows the company to obtain a quick, one-time capital injection to help maintain its cash flow. 

Who is bridge financing for? 

These are generally investors and/or public banks that participate in the bridge financing of a company. 

They then make a financial contribution to help the company and receive, in exchange, a percentage of the share capital, in several forms: 

• The BSA-AIR, in other words the warrants of subscription of shares - agreement of fast investment, interesting because rather adapted to the bridge operations with small amount. 
• BSARs, redeemable share subscription warrants, are ideal for large transactions.
• Convertible bonds (CB) into shares, which are more relevant for companies that bridge a large amount of money. 
• An associate current account, a perfect option for shareholders who want to reinvest their funds in the company.

Unlike traditional financing,equity bridge puts the credit analysis on the fund's investors. It is therefore essential to have quality investors, because in the event of a cash flow failure, they can represent the ultimate financial recourse. 

Bridge financing can involve all types of investment funds. 

When to use bridge financing? 

If you have anticipated your expenses, and the financing needed to grow your business, you may not need bridge financing. However, some businesses may have urgent cash flow needs before a new round of financing. 

This is when bridge financing must be used. It is necessary to calculate with accuracy the amount to borrow to hold before the next round. 

There are also alternative financing strategies that will anticipate the use of bridge financing, in particular to add some funds to give the company time to enter the market with more strength. 

How does bridge financing work? 

The dilutive effect of the bridge is immediate, and the investor instantly becomes a shareholder. Bridge warrants or convertible bonds, on the other hand, have a deferred dilutive effect over time, which means that once the investor has received convertible bonds or warrants, they can then convert their convertible bonds into shares or exercise the warrants in exchange for shares.

The option chosen by the company will depend on its financial situation, its investors and its objectives. The company in a relatively more stable situation will have more flexibility in negotiating contracts with its investors. 

Depending on the timing of the contracts for the repayment of the loan, some clauses may require an increase in interest after a certain period of time, or an immediate repayment. 

Different forms of bridge financing

Bridge financing can take the form of debt or equity, and can also be used in an IPO (Initial Public Offering). Bridges are usually for short-term objectives for the company and are attached to fairly high interest rates. 

We can distinguish between: equity bridge, in the form ofconvertible bonds (OC), the BSA AIR, or the contributions in partner's current account (CCA), in the case where the shareholders have sufficient equity to reinvest them in their company. 

The bridge in convertible bonds (CB) requires certain terms of repayment, as it is a debt. Repayment can therefore be made in cash or through shares. 

The entrepreneur and the investors must in this case agree on a convertible bond contract. This defines the terms of repayment, the interest rate, the maximum duration of the loan and the triggers for the conversion of the bonds into shares. 

The BSA Air is the investment tool that allows a quick investment in a company. Once the terms and conditions are defined between the entrepreneur and the investor, the latter recovers shares through the exercise of his BSAR. 

Once the fast-track investment agreement is signed, the investor benefits from a discount of between 5 and 30%, in advantage over investors in the next round of financing. This is a real investment security for the investor. 

What are the advantages and disadvantages of bridge financing? 

Bridge financing for companies

One of the advantages of bridge financing is that it can be obtained quickly. As explained in the article, it provides the company with a financial solution in case of emergency, in order to maintain a certain level of cash flow. 

One of the major disadvantages is the rather high interest rate of bridge financing, rarely below 15%. 

This dilution implies that you will have less autonomy in the management of your company, with frequent board meetings, where your strategy and decision making will be discussed 

Finally, diluting the capital of one's company with more investors increases the chances of diverging expectations and interests of the company, which can make the management of the company more complex.   

Bridge financing for investors

For investors, when they grant the bridge, they can see the advantage of strengthening their presence inthe company's capital, under certain conditions. 

In addition, equity is generally based on the valuation of the previous fundraising, and investors are therefore in a strong position with respect to the next fundraising. It provides flexibility and performance in managing the fund's cash flow.

Others may see it as a disadvantage, as the company's situation is risky and may lead to a loss of the initial investment. 

What are the alternatives to bridge financing?

If you are looking for alternatives to bridge financing, it is probably because you need a little cash to tide you over until your next fundraising round. Some companies prefer professional credit within 48 hours to cover a one-off cash flow requirement, ensuring the continuity of their business.

Subsidies

In France, there is a lot of government support for business start-ups. There are many subsidies to be found, and at different levels.

They can take the form of financial or material aid, or social or tax relief. The BPI is a reference in this category and the possibilities for companies are numerous. 

If your need for funds is urgent, grants may not be the best solution. The application process can take some time to complete.

Honorary loans

In France, there are also honorary loans, which are regional loans with a ceiling of 90 000 €. They have the advantage of being without risk of capital dilution and at zero interest.

Generally, the recipient, in this case the business owner, gives their word of honor to repay the loan in three to five installments after receiving it. However, administrative procedures can also be lengthy.

There are also hybrid models, such asconvertible bond.

Karmen Loan: The fast and flexible financing solution

We launched Karmen Loan to meet all business financing needs, from working capital to growth investments. Our financing solution provides professional credit ranging from €30,000 to €5,000,000, over 1 to 24 months, tailored to each business's development.

With Karmen Loan, you can finance your business online. Our digitalized process allows you to get a response within 48 hours, with transparency on costs, monthly payments, guarantees, and the repayment schedule.

Bridge financing is a valuable solution for navigating strategic milestones. It ensures business continuity during pivotal periods. Bridge financing can serve as a transitional step before implementing growth financing, which is considered more sustainable.

When planned well in advance, it facilitates the success of your expansion projects. Take the time to assess your needs in order to choose the strategy best suited to your company's trajectory.