Bridge Financing Explained: Pros and Cons for Growth-Stage Companies
As growth-stage companies go through rounds of raising capital and scaling the business, it can become challenging in the interim periods to address immediate cash flow needs. To get through those uncertain times, many turn to bridge financing.
Bridge financing can be a highly effective solution. It allows regular operations to continue while you plan and prepare for growth. Using debt to address bridge financing needs offers the additional benefit of preserving equity while still infusing the company with capital for continued operations.
If your company is looking for additional capital between larger raises, it’s an option worth considering, and one that’s rapidly increasing in popularity: In the first quarter of 2024, 42% of all seed-stage investments on Carta were bridge rounds, while Series A bridge rounds accounted for the second-highest rate of the 2020s at 43%.
With extra flexibility, this form of financing, whether from investment or private credit, can help growth-stage companies maintain financial control while meeting urgent funding needs.
We’ll cover what bridge financing is, some of its most common uses, and the benefits and potential challenges to consider when employing this financial strategy.
What Is Bridge Financing?
Bridge financing is a short-term financial solution companies use to cover immediate expenses or capitalize on opportunities while they gear up to secure longer-term financing or start generating revenue. As the name suggests, it acts as a bridge that connects companies from one funding milestone to the next.
With a debt approach to bridge financing, growth-stage companies typically enjoy a quicker approval process and deals designed to meet more immediate cash flow needs.
For companies in sectors with high growth potential, bridge financing is often a lifeline. They can receive capital quickly and with greater flexibility than traditional funding sources offer, though it’s important to consider the possibility of higher interest rates or shorter repayment periods.
Need to delay equity rounds and avoid diluting ownership early on? Bridge financing could be the best fit for your team.
Common Uses of Bridge Financing
Short-Term Capital Needs: Looking for more funds to cover everyday expenses? Have a great opportunity but not enough capital to take advantage of it? Bridge financing is often used to address these kinds of immediate funding needs, which can pop up while companies await long-term financing.
Filling Funding Gaps: One of the primary roles of bridge financing is to fill in the gaps in capital that can occur between funding rounds. It provides temporary funding until the next round closes, helping companies meet more growth targets or maintain financial health during the lead-up period.
Opportunistic Investments: Bridge financing helps companies act on time-sensitive opportunities. In cases where quick access to capital is essential, such as acquiring another business, launching a product, or expanding into a new market, bridge financing helps growing companies seize opportunities instead of missing out due to a lack of funds.
Meeting Short-Term Goals: Your company might just need some additional runway to help you meet key milestones that will later attract lenders and investors. With the right use of capital, bridge financing could be the difference between successfully securing a VC round or stalling due to lack of funds.
Growth and Expansion: The timing of your growth and your funding rounds won’t always line up. Bridge financing can help you scale by funding expansion efforts or managing unexpected costs. Particularly if you’re undergoing rapid growth, this solution offers the flexibility you need to meet the financial demands of hiring, expanding infrastructure, and increasing marketing.
Pros of Bridge Financing
Quicker Access to Capital
Bridge financing generally allows companies to access funds along far faster timelines than traditional loans can accommodate. For growth-stage companies, rapid funding can be crucial for making the most of time-sensitive opportunities.
Flexibility
Bridge financing is an adaptable solution that often comes with more personalized terms to match your company’s situation and immediate needs.
Preserving Equity
One significant advantage of bridge financing is that it allows companies to delay equity financing and avoid dilution of ownership. You can position your team for future fundraising and meet capital needs at the same time—all without issuing more equity.
Ability to Take Opportunities
As new opportunities come up, sometimes it’s necessary to respond or act immediately—especially as they relate to your growth and future profitability. Bridge financing can help you do that by supporting strategic investments on short notice.
Potential Risks of Bridge Financing
Higher Costs
When considering if bridge financing will work for your team, it can help to keep in mind that it often comes with higher interest rates and fees compared to long-term financing. This premium compensates lenders for the additional risk they take on, but it can add a financial burden for your company that you’ll need to adjust for.
Short-Term Time Frame
Bridge loans are typically designed for shorter time frames. Repayment periods range from a few months to a year, which can place pressure on your company to secure permanent financing.
Additional Debt Risk
Taking on additional debt at any time can increase your company’s financial risk, especially if cash flow is insufficient to cover regular payments. For growth-stage companies, accumulating too much debt through bridge financing can strain proper cash flow management, in turn impacting operations and long-term viability.
How to Secure Bridge Financing
1. Prepare a Strong Pitch and Financial Documentation
To increase your chances of securing bridge financing, be sure to take the time to prepare a clear pitch that presents your leadership team and vision clearly and favorably. You’ll also need to compile a detailed financial history in industry-standard formats that lenders are familiar with. Need help with creating financing projections or a growth roadmap? 5th Line’s team of advisors can help.
2. Partner With the Right Lender
Not every lender will be able to offer the unique terms you need for bridge financing, so finding lenders experienced in short-term business funding will make the rest of the process—negotiating terms that align with your goals—much easier. Look for a partner with experience in your industry and an understanding of the challenges growth-stage companies face.
3. Evaluate Terms and Conditions
Be sure not to jump into a bridge financing agreement. Before signing, carefully review the terms to understand the full scope of your possible financial obligations, including interest rates, fees, and repayment schedules.
Final Thoughts
Bridge financing can be an incredibly valuable tool for growth-stage companies. As you look to get through periods of growth, cover short-term gaps in funding, and seize new opportunities, a flexible approach can simplify your path forward. Bridge rounds are also rising in popularity, making it an option worth considering for growing teams in need of the right amount of capital at just the right time.
Ready to envision how bridge financing could support your company’s growth? Get in touch with 5th Line to connect with experts and learn more about the best types of financing for your team.