Fundraising is like finding a producer for a movie that you are going to direct except that the business idea is your movie script and the investors are the producers. Bridge loan is a product of the environment where either the investors are scarce or the business is not a hit initially. Of all the loans available today in the market place, bridge loan is one of them. Bridge loans are the ones that come into the play when the company has exhausted its initial round of funding and waiting for the next round from the same investors or new investors.
What is Bridge Loan?
Bridge loan, just as the name indicates is the loan that bridges a financial gap between present and future. It helps run the company for the time being. The reasons for a bridge loan are plenty. One of the reasons can be that a company is awaiting further funding during which money is required to sustain the company.
Some of the features of a bridge loan are high interest rates, short loan term (anywhere between 2 months to 24 months), only the simple interest needs to be paid until the end of term during which the principal will be cleared of in lump sum basis.
Bridge loans are no more seen with a tinge of negativity. It’s become such a practice that a company entirely launches with the help of bridge loan awaiting its first round of funding. As against the past when the bridge loans were looked at as the final lease of life for a sinking company, now bridge loans are pretty much the primary funding for some companies.
Getting a Bridge Loan
There are a lot of options to get a bridge loan today as far as the entrepreneurs are concerned. The company in question can go to a bank for a bridge loan if it has a solid cash flow on a month on month basis. In other words the sales has to be a talking point to make the banks feel comfortable. The company can also get a bridge loan with the help of the future invoices. Atleast 70% to 80% of the value will be considered to be lent by the banks. The equity investors are another institution who can provide a bridge loan. They sanction a bridge loan against the stock purchase they will execute in the future.
In some cases, a bridge loan is a final attempt at reviving a company and in other cases it is the funding that is going to give birth to a company or an idea. A bridge loan is very different from the concept of funding though, it can be a straight forward loan for which the simple interest has to be paid monthly. Later on the principal must be returned at the tenure, which may vary between 2 months to 24 months.
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