What is bridge financing?

The bridge financing is a short-term short-termusually requested by a company, usually a start-up, to finance an urgent need for cash. cash flow. Companies generally use this type of financing between two rounds of financing. Bridge financing enables companies to bridge a cash flow gap for one-off needs. For example, a company may need cash in the event of unforeseen cost overruns, a delay in development or a financial support strategy. Financing your business with a bridge can be an interesting way of bringing in a little cash between two fund-raising campaigns. We tell you how to set up a bridge to ensure your success in 2024 !

What is bridge financing? 

Bridge financing is a financing technique that meets an urgent need for cash. 

This method of financing consists of soliciting a new influx of capital investors in the form of convertible bonds and on preferential terms compared to subsequent investors. 

Bridge financing is not a pre-seed. An entrepreneur can only use bridge financing if investors are already present in the capital of his company.   

There are two categories of bridge financing: 

1. Bridge Loan: It is a short-term credit of a maximum validity of one year, quick to obtain. It is a debt and can come either from a loan or from grants or subsidies. 
2. Equity Bridge: This is an equity financing, which works like a fundraising. The entrepreneur simply asks private investors or the public bank to finance him. One of the main differences, however, is that the equity bridge is based on the valuation of the previous round or on a discounted valuation of the company. 

What is the purpose of bridge financing? 

The purpose of bridge financing is quite simple: it allows founders and their companies to overcome a financially complicated stage, such as unexpected cost overruns or a delay in growth and development.

The objective of bridge financing is therefore to keep the company alive by covering cash flow needs quickly between two fundraising rounds, for example. 

In short, bridge financing allows the company to obtain a quick, one-time capital injection to help maintain its cash flow. 

Who is bridge financing for? 

These are generally investors and/or public banks that participate in the bridge financing of a company. 

They then make a financial contribution to help the company and receive, in exchange, a percentage of the share capital, in several forms: 

• The BSA-AIR, in other words the warrants of subscription of shares - agreement of fast investment, interesting because rather adapted to the bridge operations with small amount. 
• BSARs, redeemable share subscription warrants, are ideal for large transactions.
• Convertible bonds (CB) into shares, which are more relevant for companies that bridge a large amount of money. 
• An associate current account, a perfect option for shareholders who want to reinvest their funds in the company.

Unlike traditional financing,equity bridge puts the credit analysis on the fund's investors. It is therefore essential to have quality investors, because in the event of a cash flow failure, they can represent the ultimate financial recourse. 

Bridge financing can involve all types of investment funds. 

When to use bridge financing? 

If you have anticipated your expenses, and the financing needed to grow your business, you may not need bridge financing. However, some businesses may have urgent cash flow needs before a new round of financing. 

This is when bridge financing must be used. It is necessary to calculate with accuracy the amount to borrow to hold before the next round. 

There are also alternative financing strategies that will anticipate the use of bridge financing, in particular to add some funds to give the company time to enter the market with more strength. 

How does bridge financing work? 

The dilutive effect of the bridge in shares is immediate, and the investor becomes a shareholder immediately. The bridge in BSAR or in OC has a delayed dilutive effect through time, which implies that once the investor will have received OC or BSAR, he will be able to convert his OC into shares or to exercise the BSAR in exchange for shares.

The option chosen by the company will depend on its financial situation, its investors and its objectives. The company in a relatively more stable situation will have more flexibility in negotiating contracts with its investors. 

Depending on the timing of the contracts for the repayment of the loan, some clauses may require an increase in interest after a certain period of time, or an immediate repayment. 

Different forms of bridge financing

Bridge financing can take the form of debt or equity, and can also be used in an IPO (Initial Public Offering). Bridges are usually for short-term objectives for the company and are attached to fairly high interest rates. 

We can distinguish between: equity bridge, in the form ofconvertible bonds (OC), the BSA AIR, or the contributions in partner's current account (CCA), in the case where the shareholders have sufficient equity to reinvest them in their company. 

The bridge in convertible bonds (CB) requires certain terms of repayment, as it is a debt. Repayment can therefore be made in cash or through shares. 

The entrepreneur and the investors must in this case agree on a convertible bond contract. This defines the terms of repayment, the interest rate, the maximum duration of the loan and the triggers for the conversion of the bonds into shares. 

The BSA Air is the investment tool that allows a quick investment in a company. Once the terms and conditions are defined between the entrepreneur and the investor, the latter recovers shares through the exercise of his BSAR. 

Once the fast-track investment agreement is signed, the investor benefits from a discount of between 5 and 30%, in advantage over investors in the next round of financing. This is a real investment security for the investor. 

What are the advantages and disadvantages of bridge financing? 

Bridge financing for companies

One of the advantages of bridge financing is that it can be obtained quickly. As explained in the article, it provides the company with a financial solution in case of emergency, in order to maintain a certain level of cash flow. 

One of the major disadvantages is the rather high interest rate of bridge financing, rarely below 15%. 

This dilution implies that you will have less autonomy in the management of your company, with frequent board meetings, where your strategy and decision making will be discussed 

Finally, diluting the capital of one's company with more investors increases the chances of diverging expectations and interests of the company, which can make the management of the company more complex.   

Bridge financing for investors

For investors, when they grant the bridge, they can see the advantage of strengthening their presence inthe company's capital, under certain conditions. 

In addition, equity is generally based on the valuation of the previous fundraising, and investors are therefore in a strong position with respect to the next fundraising. It provides flexibility and performance in managing the fund's cash flow.

Others may see it as a disadvantage, as the company's situation is risky and may lead to a loss of the initial investment. 

What are the alternatives to bridge financing?

If you are looking for alternatives to bridge financing, it is probably because you need a little cash to hold you over until the next fundraising. In this case, we propose you some ways in France to finance yourself. 

Subsidies

In France, there is a lot of government support for business start-ups. There are many subsidies to be found, and at different levels.

They can take the form of financial or material aid, or social or tax relief. The BPI is a reference in this category and the possibilities for companies are numerous. 

If your need for funds is urgent, grants may not be the best solution. The application process can take some time to complete.

Honorary loans

In France, there are also honorary loans, which are regional loans with a ceiling of 90 000 €. They have the advantage of being without risk of capital dilution and at zero interest.

Generally, the recipient, in this case the company director, undertakes on his or her honour to repay the loan in 3 to 5 instalments by the time it is received. However, the administrative procedures can also be long. 

An alternative that is increasingly used is RBF (Revenue Based Financing). It is an innovative financing solution, which is nowadays used by companies in the digital economy. 

Revenue Based Financing

The RBF is more accessible and faster than other financing methods. Indeed, as its name indicates, it is based on the company's future revenues.

It enables digital companies to finance their own growth, quickly and without dilution. In this way, the company founder remains the majority shareholder. 

But that's not all! With RBF, funds are released within 48 hours, with no guarantees or hidden fees. Karmen's software integrates with your tools to provide a real-time, 360-degree view of your company's financial health, so you'll know if you're eligible for financing within 72 hours. 

The amount of financing can then be up to 20% of the company's annual revenues . Karmen also supports the company's long-term growth with additional tranches of financing every 2 to 3 months to fund their stock purchase or acquisition campaign. Financing must then be repaid over a period of 4 to 12 months, on a monthly basis. 

At Karmenwe are democratizing Revenue Based Financing in France. We want to accelerate the growth of digital companies.

In 48 hours, you can find out if you are eligible for the Karmen solution. To find out, go to here.