Funds are very vital for everything we do, especially in running a business or startup. Anyone might have a fantastic idea, a smart, organized team ready to execute tasks, but without funds, that idea won’t succeed as much as it should. That’s even if it gets off the ground.
Bridge funding is simply an intermediate temporary fund in a business, which is sourced mainly to cover a short-term expense while processing or accessing more stable and long-term funds.
Bridge funds are immediate alternatives for most startups especially when there is an intended business move.
Even the process of accessing bridge funds is simplified as it has short approval times.
Just like the name implies, the bridge fund serves literally as a financial bridge that enables startups to pass over a business financial downtime.
This type of quick fund is usually issued by venture capital firms, sometimes investment banks too. More often than not, bridge funds are sourced from private institutions and lenders than from banks.
Now, depending on the factors surrendering why organizations need funds, the bridge funding term length could cover six months. However, in some cases to a maximum twelve-month period.
As earlier stated, that depends on the factors the business presented while sourcing their funds. It is expected that before the loan time expires, the startup must have put up a more concrete funding plan.
There are various means of securing bridge funding, you’d have to use either collateral, such as office equipment or even the business building.
Then, there’s also equity funding, in which the funds are given in exchange for equity in a startup.
Depending on a startup growth level and credit history, more opportunities rather than the ones mentioned might be available.
While it is good to know what bridge funds are, it is very important to understand how it works very well to avoid falling into a dire financial ditch.
Also read, Review: Stages of startup funding
It is important to note that bridge funding protects the interest of the lender, so startup owners seeking it should carefully consider no alternatives are available before going for it.
In addition to that, bridge funding has high-interest rates and if care is not taken, startups might even incur more financial problems, some startups don’t survive when it gets to that point, they sell out.
Also, before deciding to opt for bridge funding, it is advisable that startup owners only take enough to cover the very pressing needs of their organization, especially if it’s equity funding.
The above doesn’t mean that startups should become overly cautious with funds, that could be very harmful to startups. Be flexible, remember it’s all calculated risks.
For Investors, when giving out bridge funds, especially to private lenders, it is advisable to give out money that wouldn’t put you in a financial crisis if the startup goes under.
Despite the danger posed by bridge funding, it has its advantages and they include the following:
- Short approval time: The funds can in cases be gotten within a few days of the loan application. This way the money comes in time to handle the business needs promptly.
- Serves as startup seed: Here, if the startup needs just enough money to launch its business so other investors could see its viability, bridge funding can be a source of seed funds.
For already existing startups, bridge funds can save them from going home. The funds aid them to sustain the startup enough to find their balance once more.
For Investors, bridge funding avails them the opportunity to get equity in a promising startup, and this often pays off quite handsomely.
Don’t miss important articles during the week. Subscribe to techbuild.africa weekly digest for updates.