What is Bridge Loan?
Bridge loans, as the name itself, bridge the gap between two financial transactions. These are also considered to be temporary loans and are usually taken for 6 months, and in certain cases that time period can also be extended to 12 months. We often find the term “Bridge Loans” circling around in the real estate sector, especially in buying a new house before selling the old / current one. Bridge Loans also exists outside the boundaries of Real Estate sector, and are quite rare in funding a Start–Up.
Bridge Loan in Start-Up
Bridge Loans existence in Start–Ups is quite tricky and cautious. Young entrepreneurs who might have just graduated from college, and start establishing a company based on a single or a couple of ideas, cannot keep on spending months together in trying to negotiate terms with Angel Investors, VCs and Bank. Bridge loans at this juncture serve the purpose of releasing the cash quickly with documentation as less as one page at times. Bridge loans in this context simple means, “Cash First, Terms Later”, which also means that, the cash would be initially provided and later the company can negotiate the terms with respect to the Bridge Loan either by offering a percentage of stock, or if not, continue paying the interest and the principal amount after a certain time.
If the company is about to seek a financial transaction, or a worthy deal, the cash in the form of Bridge Loan can be obtained and can be used to complete the expected transaction, thereby taking the company on a positive note.
Bridge Loans – Example
For example, a company is in the middle of “Second” round of funding with 3 angel investors A, B, C trying to pump in $150,000 together, with $65,000 from A in 4 months, $45,000 from C in 5 months and $40,000 each in 3 months in the form of equity in the company. On the other side, the firm requires $80,000 to pay to various other services ranging from promotions, advertising campaigns, equipment purchase and other human resources. Then the firm can opt for a bridge loan to be secured for the period of 6 months to cover the upfront costs by getting a nod from all the 3 investors in the form of Letter of Intent–LOI, stating that they would be investing the proposed investments in the coming few months with some T&C to add to them. This way, a bridge loan becomes a life line, but only at a price of high fee and interest rates. The Bridge Loan sanctioning authority / individual cannot use the LOI as an agreement to ensure the Angel Investors go ahead with the proposed investments. It still upto the investors whether to invest or not. In that case, the entrepreneur had to pay the Bridge Loan completely.
Bridge Loan is not a good sign. It alerts future investors with a red flag notification. This doesn’t mean one shouldn’t have a bridge loan, but it should be explained and should have served the purpose for which it was put in place.
Recommended Read :
- Bridge Loan Start Ventures
- What is Vendor Financing?
- Raising Fund From Family and Friends for Start Up Venture
- How to Secure a Micro Loan for Start Up Business?
- How to Invest in a Start Up?
- Risks Involved in Start Up Investing
- How Can I Become An Angel Investor?
- How Risky is to Become An Angel Investor?
- What is Bridge Loan?
- What is Venture Debt Financing?