by Jonathan Itamah

Bridge Financing

Bridge financing is a form of short-term financing that is extended to companies in an attempt to cover their interim costs until they secure long-term financing. As bridge financing acts as a bridge between a company’s short-term and long-term financial needs, it is ideal for urgent needs like acquisition financing, where there is a gap and, to a lesser extent, working capital.

It is important to note that this financing attracts substantial interest rates due to increased risks.

The loan is often used when companies float their initial public offers(IPOs) and may be used as a substitute for equity in the company.

What are the types of bridge financing?

IPO bridge financing

In investment banking, bridge financing is a financing method that is used by companies starting out before they raise funds for their initial public offer (IPO). The amount received from this financing covers short-term expenses such as those incurred during the IPO activities.

The loan is easily settled as the amount raised during the IPO exercise is used to repay immediately.

Debt bridge financing

When businesses take debt bridge financing, they subscribe to a short-term loan before accessing long-term capital funds or financial means. Taking debt bridge finances should be approached with caution and often be the last solution to your financial needs as they attract more effective interest rates, but this is mitigated by adequate collateral.

Equity bridge financing

To avoid high-interest debt, some companies may negotiate with firms to provide equity bridge financing in exchange for their company’s agreed units of capital. In such an instance, the capital firm will only agree to the terms after an in-depth analysis of the company to ascertain its viability and profitability. A profitable company means its value will increase so that the capital provider will recoup its investment.

Terms and conditions of bridge financing

Although bridge financing is often expensive, its short-term nature of it mitigates the impact. The interest rates attached to the loan will vary depending on the financial institutions offering it, such as the repayment duration, the borrowing company’s financial position, the ongoing market rate, and other market factors (and collateral).

In this regard, it is essential to have a genuine and expert advisor like the SZC group who thoroughly understands the market and industry expertise in various sectors. We will offer you personalized services like walking with you every step of the way to better understand your business and tailor products that are most beneficial to you through our client managers.

Final Thoughts

Suppose you consider bridge financing for your enterprise as your initial source of funds before launching an IPO. In that case, it is essential to tread cautiously and consult widely before arriving at a decision.

Weigh the pros and cons, such as the profitable ability of your venture, the duration it will take to break even and be profitable, the profit margins, the repayment potential, the value and amount of assets, and the operational expenses that will be incurred during the process. This way, you will be in a better position to handle whatever comes your way.