Bridge Loan Agreements for the Small to Mid-Sized Business

One of the financing mechanisms I have not discussed recently concerns bridge loan funding for small to mid-sized businesses. 

In an earlier post about obtaining a credit line for a venture-backed business, I highlighted some of the considerations involved in determining whether a credit line was right for that stage of a company’s evolution.  Many of those issues are the same for an emerging company reviewing the applicability of a bridge loan.

The difference between the two forms of credit (a credit line versus a bridge loan) are subtle but distinct.  To review, a credit line typically has the following characteristics:

• it is typically used as to complement working capital
• it can be used in a venture-backed company environment as a bridge to an important valuation milestone, but the company typically must be able to service the debt from current operations,
• it is generally collateralized against working capital and/or all the assets of a business

A bridge loan has similar characteristics, but it is typically used in shorter-term circumstances to help the company “bridge” the gap between its current resources and a future, typically near-term funding event.  For example, if a company is in the process of raising another round of capital or selling a portion of its business and it requires an immediate capital infusion to cover its current operations, it may obtain a bridge loan to meet those requirements.  Since repayment may very likely be contingent on that future event happening, there are several risk premiums associated with the bridge loan.  These may include:

• an interest rate premium
• extensive collateralization against the company’s assets
• a short-term maturity (typically on the earlier of a year or the occurrence of the funding event)
• a conversion to equity feature, typically with some sort of premium valuation feature

One of the many lasting benefits of the dot-com boom is that it left us with a number of surviving publicly held companies which are still relatively small.  As with all public companies in the US, they are required to file material contracts with the Securities and Exchange Commission, which are then publicly available.  These include bridge loan agreements, revolving credit agreements, credit lines, and many other loan agreements.   They can be reviewed by potential borrowers to better understand what the potential deal provisions might be.  I’ve highlighted one such bridge loan agreement for a small (~$5million revenue) software provider, and you can find hundreds of similar agreements at www.RealDealDocs.com.