During the life of a business, certain financial operations take time: fundraising, acquisitions, initial public offerings, and more. Meanwhile, cash flow needs continue. In these situations, bridge financing—also called “bridge finance”—can be used. This temporary financing allows companies to stabilize their cash flows while awaiting more significant financing. Used properly, bridge financing can avoid cash flow crunches and allow companies to pursue growth without negatively affecting operations.

In this article, we explain bridge financing in France, including different types, which companies can use it, and how to obtain it.

What’s in this article?

• What is bridge financing?
  
• What are the types of bridge financing?
  
• Why should a business use bridge financing?
  
• Which types of businesses can obtain bridge financing?
  
• Advantages and disadvantages of bridge financing
  
• How to obtain bridge financing
  
• Alternatives to bridge financing
  
• How Stripe Capital can help
  

What is bridge financing?

Bridge financing is short-term financing meant to cover a business’s urgent cash needs, specifically startups. This type of temporary financing is often used before more significant financing has been obtained or before a financial event takes place. Bridge financing typically lasts for one year.

Also known as “bridge finance” or “bridge lending,” bridge financing is a temporary loan that provides a “bridge” between financial operations, such as the following:

• Fundraising near completion
  
• Sale of an important asset
  
• Negotiation of bank refinancing
  
• Initial public offering
  

For example, a software-as-a-service (SaaS) startup is in growth mode and preparing for Series B funding of €10 million from venture capitalists. While waiting for these funds—which can take several months—the startup needs cash to continue its business activities (e.g., recruiting, product investments). The business seeks bridge financing of €2 million to cover its cash flow needs before receipt of the €10 million raised.

What are the types of bridge financing?

There are two types of bridge financing: bridge loans and bridge equity. A bridge loan is intermediary financing and considered a debt. It is used while awaiting a larger loan or the disbursement of public funds. Bridge equity is typically obtained before a startup raises venture capital or participates in an initial public offering.

Bridge loans

A bridge loan is a short-term business loan awarded quickly by a bank or private funding source with repayment scheduled after a specific event has occurred, such as fundraising or the sale of assets. Considered a debt, it is used while waiting for a long-term business loan or the disbursement of grants or subsidies. Unlike bridge equity, it does not involve opening up the company’s equity to new shareholders. This type of bridge financing generally has a maximum term of one year.

In France, this type of business financing is similar to a bank-funded gap loan. This loan allows businesses to fill funding gaps between acquiring new business assets and sales of the assets being replaced.

Bridge equity

Bridge equity is a type of cash advance exchangeable for convertible instruments. The financing obtained dilutes the business’s capital because the investors receive shares at the next fundraising phase. This financing can be obtained quickly from private investors or public institutions.

Conversion terms are often advantageous for investors because they are typically based on the company’s previous valuation—the last time fundraising occurred.

There are several types of bridge equity loans, depending on the company’s situation, investors, and objectives:

• Convertible bonds: These are bonds that include an option to convert into new shares.
  
• Redeemable share warrants (bons de souscription d’actions remboursables, or BSAR): These are warrants that can be repurchased by the issuer.
  
• Rapid investment warrant agreements (bon de souscription d’actions par accord d’investissement rapide, or BSA-AIR): Rapid investment warrant agreements allow businesses to immediately receive funding that is later converted into shares. This is typically accompanied by a discount—often 5%–30%—on the cost of subscription the next time fundraising occurs.
  
• Partner’s current account: This is a cash advance provided by a shareholder to the company. It grants the lender the status of a corporate creditor.
  

During the COVID-19 pandemic in France and as part of The Future Investment Program (Le programme d’investissements d’avenir), Bpifrance created the French Tech Bridge. This program includes bridge equity financing for 6–24 months and is targeted at new startups founded less than eight years prior. It is designed to help startups that have begun the process of fundraising but have not yet completed it.

Why should a business use bridge financing?

Bridge financing allows startups and businesses experiencing growth to use a one-off cash contribution to ensure financial stability during important periods. This allows the business to continue to function normally, avoid a business liquidity shortfall, and limit the risk of insolvency while waiting for a larger influx of funds.

This type of financing is typically used during two fundraising attempts: before an initial public offering or during a merger or acquisition. Bridge lending makes it possible to do the following:

• Maintain operational cash flow
  
• Finance growth or improvements
  
• Support an important operation
  
• Avoid slowing business activity
  

Which types of businesses can obtain bridge financing?

Bridge financing is mainly targeted at businesses that have already established financial credibility and have good visibility into their future financing needs. Businesses that use bridge financing the most include the following:

• Startups in growth phases
  
• Innovative small and medium-sized businesses (SMEs)
  
• Businesses undertaking acquisitions
  
• Companies undergoing financial restructuring
  
• Businesses preparing for market activity
  

Advantages and disadvantages of bridge financing

Bridge financing offers several advantages to businesses and investors. It allows businesses to rapidly access funds and maintain operations. For investors, it is an efficient way to strengthen their presence within a company’s capital. However, this type of financing also has certain limits—specifically, its cost.

Bridge financing advantages

• Quick access to funds: Funds are more rapidly accessible than with more traditional business loans—sometimes within weeks. This allows businesses to respond efficiently to urgent needs for cash.
  
• Continued activity: Bridge financing avoids cash shortfalls that can compromise the business’s growth.
  
• Stronger capital presence: In some cases, investors who propose bridge financing benefit from investing under more advantageous conditions than future investors, specifically when valuation is based on previous fundraising.
  
• Early repayment: Bridge financing—specifically bridge loans—allow businesses to repay lenders early when the business obtains anticipated financing, according to agreed-upon conditions.
  

Bridge financing disadvantages

• High interest rates: The cost of bridge financing—bridge loans and bridge equity—is usually higher than the cost of a traditional loan.
  
• Dilution of capital: Bridge equity dilutes a business’s capital, and this can reduce executives’ control. It can also create diverging expectations among investors, the company’s best interests, and approaches to governance.
  
• Risky investment: Bridge lending represents a financial risk for investors because the loan is short term, repayment depends on a future event, and the business’s financial situation can change quickly.
  
• Dependency on a future event: Repayment of this type of loan is often dependent on successful fundraising, an initial public offering, or the sale of assets. If the anticipated event does not occur, the business can be put into a challenging financial situation (e.g., loan refinancing, bank seizure of assets).
  
• Collateral: In certain cases, investors require collateral to compensate for the risk of nonpayment, such as capital, office space, stocks, etc.
  

How to obtain bridge financing

To convince an investor to offer bridge financing, the business must demonstrate a need for liquidity and the viability of the future repayment source. The business must also select the best partner and carefully structure the financing terms.

Identify the source of repayment

From the beginning, a business must clearly demonstrate what event will enable repayment of bridge financing, such as fundraising, bank refinancing, the sale of assets, or an initial public offering. It must also inform the lender when the loan will be repaid. The closer the event, the more plausible the possibility of repayment.

Prepare a financial file

As with any financing transaction—whether with banks, other companies, or angel investors—a company seeking bridge financing must prepare a comprehensive application package. It should include several documents: recent financial statements, cash flow projections, a business plan, an overall financing strategy, key performance indicators, etc.

Anticipate the impact of bridge financing

Bridge financing is not simply a loan. It can result in significant consequences for the company, especially bridge equity. For example, bridge equity can lead to diluted capital. Investment is transformed into shares at the next fundraising cycle, often at a discount. Investors can obtain more shares than if they received capital under the same conditions as new investors.

This dilution can be significant for the business’s executives, especially if there are several cycles of bridge financing. This can significantly reduce the value of their capital.

Identify financial partners

In France, bridge financing is usually offered by several categories of lenders:

• Existing investors
  
• Private debt funds, in the case of bridge loans
  
• Investment banks
  

Structure bridge financing terms

Once the business identifies its financial partner, it must negotiate the loan agreement. The agreement must define the following:

• Amount of financing, which must cover the need for cash until the main financing is available
  
• Duration of financing, usually 6–24 months
  
• Interest rate
  
• Guarantees required by the investors, such as company assets, shares, or other collateral
  
• Conversion clauses, for bridge equity
  
• Discounted shares, with a reasonable discount
  
• Repayment terms
  

Alternatives to bridge financing

For businesses that cannot or don’t want to seek bridge financing, there are other financial solutions available to cover urgent cash needs:

• Short-term credit: Different types of short-term credit are available to quickly obtain funds when cash is low, such as overdrafts, cash discounts, factoring, or reverse factoring.
  
• Honor loans: Honor loans are personal, no-interest loans granted to entrepreneurs to create, acquire, or grow a business.
  
• Intercompany loans: Intercompany loans are short-term loans agreed upon by two businesses with economic ties.
  
• Public subsidies: The French government offers several types of financial assistance and subsidies for businesses that need cash, such as subsidies through the Agency for Ecological Transition (agence de la transition écologique, or ADEME).
  

How Stripe Capital can help

Stripe Capital offers revenue-based financing solutions to help your business access the funds it needs to grow.

Capital can help you:

• Access growth capital faster: Get approved for a loan or merchant cash advance in minutes—without the lengthy application process and collateral requirements of traditional bank loans.
  
• Align financing with your revenue: Capital’s revenue-based structure means you pay a fixed percentage of your daily sales, so payments scale with your business performance. If the amount that you pay through sales doesn’t meet the minimum due each payment period, Capital will automatically debit the remaining amount from your bank account at the end of the period.
  
• Expand with confidence: Fund growth initiatives such as marketing campaigns, new hires, inventory expansion, and more—without diluting your equity or personal assets.
  
• Use Stripe’s expertise: Capital provides custom financing solutions informed by Stripe’s deep expertise and payments data.
  

Learn more about how Stripe Capital can fuel your business growth, or get started today.