Non-Profit Loans: Bridge Loan Funding 101
In the seminar “Bridge Funding 101,” Jeff Carmody, an investment and banking expert from Agility Capital, provided a comprehensive overview of one type of non-profit loans, bridge loans—a financing option that helps companies temporarily bridge financial gaps. This financing strategy often serves as an alternative to traditional equity raises and caters to companies in transitional stages, like moving from seed funding to Series A funding or awaiting acquisition. In this seminar, Carmody examined the mechanics of bridge loans, their various forms, reasons companies opt for this financing method, and what investors seek in a company before offering bridge loan funding.
🔬Read more about other types of non-profit loans here
Bridge loans, which typically mature in 6 to 24 months, are short-term loans designed to bridge specific financial gaps for companies. These gaps could include the time between two fundraising rounds (e.g., from seed to Series A), between high cash burn and cash flow generation, or between general operations and acquisition.
Bridge loans vary in structure and can be arranged as convertible debt, equity, or traditional debt. In that way, they’re similar to convertible loans, but we’ll talk more about that later. They offer flexible repayment options, allowing companies either to repay the loan or convert it to equity at the close of the financing event.
Sources for bridge loan funding vary widely and include insiders like investors familiar with the company, strategic partners or customers, family members, and third-party lenders or banks. However, banks are often reluctant to provide bridge loans due to their risk profile, leaving non-traditional lenders as more viable options.
Bridge loans give companies the breathing room needed to reach milestones, like product launches or acquisitions, without resorting to more costly equity rounds. This extension provides working capital to achieve goals that might otherwise be financially out of reach.
Bridge loans are typically faster to secure than a full equity round, which requires more negotiation and can introduce board conflicts. They also tend to incur fewer legal and administrative costs, reducing the financial and temporal burden on the company.
For companies needing more substantial funding than a receivables-based line of credit, bridge loans provide a more comprehensive financing option. They serve as a stepping stone to larger or more conventional debt facilities, such as bank loans.
🔬Learn more about how to fund you non-profit startup here
Convertible loans act as equity in disguise, making them suitable for companies not yet ready for a full equity raise. These loans typically come from insiders or existing investors and are unsecured. The principal and accrued interest automatically convert into equity upon reaching the next round of funding. Convertible loans often include enhancements or “sweeteners,” such as discounted equity purchase prices or warrants, providing additional incentives for lenders to support the company. Another benefit is that they are generally free of covenants, providing a streamlined and flexible option for companies needing a quick capital infusion, with terms set within days.
In contrast, straight bridge loans, which come from banks or non-bank lenders, operate purely as loans without automatic conversion to equity. They are commonly senior secured, meaning that their lenders hold the highest priority in the capital stack, making them the first to be paid in the event of liquidation. Repayment is typically structured with monthly interest payments, operational or liquidity covenants, and collateral requirements. The setup of straight loans is more complex and takes about two to six weeks, longer than convertible loans but still faster than the process of raising equity. These loans include covenants as “guardrails,” ensuring the company adheres to financial and operational standards of the lender’s specifications and giving the lender a voice in the growth of the company. Failure to comply can trigger a “call” on the loan.
🔬Learn about microloans for non-profit startups
Bridge loan funders assess several factors before providing straight loans to companies. They prioritize firms with outside capital, over $2 million in trailing revenues, and a strong management team with credible board members and advisors. Companies must demonstrate clear growth potential and provide a detailed repayment plan, considering contingencies beyond a mere equity raise. Funders also look for an established product-market fit and proof of revenue traction, which assures lenders that the company has the ability to meet its loan obligations. Some lenders will not provide non-profit bridge loans for pharmaceutical companies due to the enormous amount of capital needed to fund the development of pharmaceutical particles, or in general companies that exceed a burn rate of $200,000 per month. This can chew through a lender’s capital too rapidly.
🔬Read more about funding different funding options for your startup here
Bridge loan funders usually operate as senior secured lenders, occupying the top position in the capital structure, ensuring priority in repayment over other creditors and equity holders. They secure loans by filing a Uniform Commercial Code (UCC) lien on the company’s assets, which operates like a title on a car and places other investors on notice of their senior lender status. Additional security measures include holding a security interest with the Patent and Trademark Office (PTO), a Deposit Account Control Agreement (DACA) with depository banks, and a loss payable rider from the company’s insurance provider.
Investors typically conduct due diligence by interviewing key management and customers, ensuring alignment with operational covenants, and including a Material Adverse Change (MAC) clause in the loan agreement. This clause allows the lender to call the loan in the event of severe, unexpected setbacks, such as the departure of key executives or a loss of critical customers.
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Bridge loans carry a fixed interest rate ranging from 13-16%, depending on the collateral and seniority of the loan. An origination fee of 2-5% is usually applied to cover the setup costs, which are higher than typical fees but provide compensation for the added risk and administrative expense. Additionally, a warrant covering 0.5-2% of fully diluted shares gives lenders the option to buy stock at today’s price in the future, providing them with upside potential if the company performs well.
Bridge loans are offered in several formats to meet diverse company needs. A single-draw loan releases funds in a lump sum, while multi-tranche loans disburse capital in stages, based on specific milestones. Asset-based loans, often referred to as ABL, lend funds based on a percentage of company assets, such as accounts receivable or inventory. Some structures combine ABL and team-based criteria to further customize funding solutions.
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Companies are advised to consider bridge loan funding when they have established revenue, credible growth potential, and a solid team and board in place. The optimal time to approach bridge loan funders is during critical transitions when extra capital can drive the company to the next stage—such as before a major product launch or acquisition event. However, companies should avoid bridge loans if they lack a clear repayment plan, as such loans may present substantial risks if the company is unable to raise equity or achieve significant milestones on schedule.
Bridge loan funding offers companies flexible, short-term financing to reach pivotal milestones, often faster and with less red tape than traditional equity raises. Through convertible or straight bridge loans, businesses can secure vital working capital to extend their runway, fund operations, or prepare for future financing rounds or acquisitions. By carefully selecting bridge lenders and understanding the structure, pricing, and security mechanisms involved, companies can leverage bridge loans strategically to overcome interim funding gaps and unlock long-term growth.
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