how bridge financing works
bridge financing bridges the gap between the time when a company s money is set to run out and when it can expect to receive an infusion of funds later on this type of financing is most normally used to fulfill a company s short term working capital needs there are multiple ways that bridge financing can be arranged which option a firm or entity uses will depend on the options available to them a company in a relatively solid position that needs a bit of short term help may have more options than a company facing greater distress bridge financing options include debt equity and ipo bridge financing types of bridge financingone option with bridge financing is for a company to take out a short term high interest loan known as a bridge loan companies who seek bridge financing through a bridge loan need to be careful however because the interest rates are sometimes so high that it can cause further financial struggles if for example a company is already approved for a 500 000 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 sometimes companies do not want to incur debt with high interest if this is the case they 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 scenario 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 take such a deal if they believe the company will ultimately become profitable which will see its stake in the company increase in value bridge financing in investment banking terms is a method of financing used by companies before their ipo this type of bridge financing is designed to cover expenses associated with the ipo and is typically short term in nature once the ipo is complete the cash raised from the offering immediately pays off the loan liability these funds are usually supplied by the investment bank underwriting the new issue 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 financingbridge financing is quite common in many industries since there are always struggling companies the mining sector is filled with small players who often use bridge financing in order to develop a mine or to cover costs until they can issue more shares a common way of raising funds in the sector bridge financing is rarely straightforward and will often include a number of provisions that help protect the entity providing the financing 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 that 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 