What is Bridge Financing?

Bridge financing is generally a short-term debt financing that provides capital to a company to enable it to consummate another transaction, e.g., a terminal event, and is generally repaid from the proceeds of such transaction.

For example, if a company is closing a large funding in 90 days, it may require a smaller short term funding immediately to get to the larger closing and will use of portion of the proceeds of the larger funding to repay the bridge financing.

Is This a “Bridge” or a “Pier”?

Other than the terms of the bridge financing, the greatest concerns of a prospective investor are:

  • “what is the event that we are bridging to, e.g., the terminal event?”
  • “what are the terms of terminal event?” and
  • “how likely is that the terminal event will be consummated?”

Terminal events can be any event which either provides the necessary liquidity to the company to repay the bridge note, e.g., a public offering, a private financing, a contractual payment, etc., or could be an event designed to permit or require the investor in the bridge to convert their bridge note into securities of the company at a discount to the valuation used in the terminal event.

As a result of these factors, a bridge financing, even though relatively short-term in nature, is in many ways riskier than ordinary corporate credit. In addition to the overall credit risk associated with the company, there is the risk that the terminal event will not take place or that counterparties to the terminal event may be required to change as a result of market conditions or otherwise.

In general, bridge financing has the following terms and conditions:

Bridge financing terms and conditions

Interest

Interest can range from very reasonable to mezzanine level (4% to 18% per annum).

Maturity

Bridge debt tends to mature within one to two years.

Conversion

If issued in connection with a terminal event which is a capital transaction, bridge debt is often convertible into the securities to be issued in the terminal event at the lower of a discount to the pricing of the terminal event or at a fix price. Conversion may be at the option of the company or the investor, depending upon the transaction. In the case of public companies, conversion may be mandatory if market price and volume milestones are satisfied.

Prepayment

Non-convertible bridge financings tend to be subject to repayment without premium or penalty, although at times yield protection provisions will be triggered, resulting in an additional payment to the investor. Convertible bridge financings are usually subject to prepayment only with prior written notice with a sufficient time period to permit voluntary conversion by the investor.

Original Issue Discount

Particularly in the case of bridge financings conducted by private companies, although not exclusively, the bridge note may contain provisions requiring an original issue discount (e.g., a payment in excess of the principal amount invested and accrued and unpaid interest).

Equity Kicker

Bridge notes are often accompanied by equity securities designed to serve as an addition deal sweetener or “kicker”. This kicker can be in the form of warrants or shares of common or preferred stock.

Conclusion

Bridge financing serves a vital function by permitting companies with limited capital to continue operations and growth until important terminal events take place. As a result, bridge financing is often relatively expensive, but can be the perfect “fuel in the tank” which a company needs to execute its business and growth objectives.

Seeking bridge financing? We are always happy to discuss the funding and growth options available to a company. Get in touch with our team below.

Is Your Company Too Small For Funding?

We often speak to companies that are earlier stage, and they ask us, are we too small for funding? The reality is that there are very few companies that are too small for funding. We’ve made a strong effort over the years to get to know a variety of different types of capital sources, so we can provide all of our clients with options when it comes to capital partners, regardless of the company’s size.

We’ve laid out below a number of different funding options for smaller companies based on a company’s size.

To learn about the funding options for larger companies, take a look at our free report: Funding Your Company: Finding the Right Partners.

Seed/Angel Stage (Pre-Revenue)

Investors in Seed/Angel Stage companies invest based on the belief that the management has the ability to create and grow the company to be something great. Seed/Angel investors expect a very large return on their investments as the company grows.

Family & Friends

Friends and Family are great sources of funding when other sources are less readily available. It is important to make sure that Friends and Family investors understand the risk of investing in Seed/Angel Stage companies.

Crowdfunding

Crowdfunding allows a Seed/Angel Stage company to raise capital from unaccredited investors. As we previously mentioned, Crowdfunding can cause problems later on, and when possible, non-equity crowdfunding such as product-based crowdfunding should be considered.

Venture Capital

There are all kinds of Venture Capital firms. Generally, an investment from a Venture Capital investor is more structured than investment from an Angel Investor. While most Venture Capital firms prefer to invest in companies with revenue, there are a large number of Venture Capital firms which will fund pre- revenue companies

Small Family Offices

Small Family Offices are similar to Angel Investors with regard to Seed/Angel Stage companies. Many Small Family Offices, however, prefer to invest in companies with a planned exit in the foreseeable future, whether it is an acquisition or public offering.

Angel Investors

Angel Investors invest in Seed/Angel Stage companies. Angel Investors generally look for very early companies that have the ability to provide them with an exponential return on their investment.

Early Stage ($0-$2M of Revenue)

Investors in Early Stage companies have a similar mindset to that of investors in Seed/Angel Stage companies, however, they expect to have more successes out of their portfolio companies. As a result of the company’s revenue, visibility on revenue, or a commercial viable product/service, the pool of potential funding sources increases.

Venture Capital

Early Stage companies are the focus of a large percentage of Venture Capital firms. From their perspective, the company has proven itself by creating a commercially viable product or service, or has generated revenue.

Small Family Offices

Small Family Offices are more likely to invest in Early Stage companies than in Seed/Angel Stage companies, due to lower perceived risk.

Small Investment Banks

If a business has the potential to scale and expand greatly, an Investment Bank may have an interest in raising funds for the company. Most Investment Banks prefer to work with later stage companies, however, there are many that prefer to work with emerging growth companies.

Expansion/Growth Stage – Late Stage ($3M-$9M of revenue)

The funding options for Expansion/Growth Stage companies and Late Stage companies are very similar, which is why we decided to group them together.

Venture Capital

Expansion/Growth Stage companies get a great amount of attention form Venture Capital investors, similar to Early Stage companies.

Small-Mid Family Offices

As a company grows, larger Family Offices will become interested in investing. Many family offices do not have the resources to invest small amounts in many companies. They prefer to invest larger amounts in fewer companies.

Small-Mid Tier Investment Banks

Mid Tier Investment Banks start to become interested as a company grows. Investment banks will also consider more transaction structures such as public offerings as a company becomes larger and more established.

Alternative Commercial Credit

Most Expansion / Growth or Late Stage companies will have some form of collateral that can be used to obtain commercial credit. Alternative Lenders will consider anything from physical assets to recurring revenue.

Strategic Investors

At this stage, Strategic Investors may begin to become interested in a company. Strategic Investors look for complementary products/services, and will often invest more or at higher valuations than purely financial investors.

Crowdfunding

As with Early Stage companies, Expansion / Growth and Late Stage companies can raise capital through crowdfunding offerings.

Seeking Capital? Let’s discuss how we can help. Get in touch with our team below.

Can You Finance Your Accounts Receivables?

For small and medium-sized companies, maintaining healthy cash flow is crucial for sustaining growth and managing day-to-day operations. However, unpaid invoices often tie up critical working capital, creating financial bottlenecks that can slow business growth or even threaten its survival. This is where accounts receivable financing can play a pivotal role.

Accounts receivable financing is a type of loan that allows a company to leverage its unpaid invoices as collateral to secure funding. Instead of waiting 30, 60, or even 90 days for customers to pay their invoices, businesses can access immediate cash to meet their financial needs, pursue growth opportunities, and maintain operational efficiency. For companies looking to finance growth, this option can be a game-changer, providing a steady stream of working capital without taking on excessive debt or diluting equity.

How Accounts Receivable Financing Works

The mechanics of accounts receivable financing are relatively straightforward. A company with outstanding invoices turns to a lender who assesses the value and collectability of those invoices. The lender then provides a percentage of the invoice amount upfront—typically 70% to 90%—as a loan, with the remaining balance minus fees released once the invoices are paid. This process gives businesses the flexibility to continue operations, fund payroll, purchase inventory, or finance new projects without waiting for their customers to settle their accounts.

Accounts receivable financing is particularly attractive for companies that experience seasonal fluctuations in revenue or operate in industries where long payment terms are standard, such as manufacturing, retail, and logistics. By converting unpaid invoices into quick cash, businesses can stay ahead of expenses and focus on achieving their strategic goals.

Alternative Lenders: A Flexible Option

When small and medium-sized businesses don’t meet the stringent credit or collateral requirements of traditional bank loans, alternative lenders offer a viable solution. At ClearThink Capital, we specialize in introducing companies to these alternative lenders, who are often family offices or specialized funds. Unlike banks, which tend to have rigid structures, alternative lenders provide more flexibility in terms of financing structure, interest rates, and repayment terms.

This flexibility makes accounts receivable financing accessible to a broader range of businesses, particularly those with inconsistent cash flow, limited credit histories, or unconventional financial structures. Alternative lenders are typically more focused on the quality of the receivables and the creditworthiness of the company’s customers, rather than on the borrowing company’s balance sheet.

How ClearThink Capital Works

At ClearThink Capital, we take a unique approach to helping businesses secure accounts receivable financing. Unlike some competitors, our compensation is generally derived solely from our client companies, not from referral fees or commissions from lenders. This means we are fully aligned with our clients’ best interests and incentivized to secure credit financing on the most favorable terms.

Our goal is to ensure that our clients not only gain access to the funds they need but also benefit from financing structures with limited or no covenant restrictions. This approach allows businesses to operate with greater financial flexibility and confidence.

What Accounts Receivable Lenders Look For

When evaluating whether to finance a company’s accounts receivables, lenders consider several critical factors. Understanding these can help businesses prepare and position themselves as attractive candidates for financing:

1. Contracts and Purchase Orders

The validity and enforceability of the contracts or purchase orders tied to the receivables play a crucial role in a lender’s decision-making process. Lenders will often review these documents to ensure there are no ambiguities or risks that could hinder the company’s ability to collect payment. Clear, well-drafted contracts increase the likelihood of approval and can also lead to more favorable financing terms.

2. Creditworthiness of the Obligors

One of the most important considerations for an accounts receivable lender is the creditworthiness of the customers who owe the invoices. Even if the borrowing company has a limited credit history or operates in a high-risk industry, having reliable customers with strong credit profiles can significantly boost the chances of securing financing. Lenders may even offer lower rates if the obligors are large, reputable companies or institutions.

3. Time to Payment

Accounts receivable lenders typically finance invoices with payment terms of up to 90 days. Invoices with shorter payment cycles are generally seen as less risky, which can result in faster approvals and better rates. For businesses with longer payment terms, it’s important to evaluate whether their receivables fit within this time frame before seeking financing.

4. Existing Liens

If the company already has liens on its assets, this could impact the lender’s ability to finance its receivables. However, many alternative lenders specialize in structuring accounts receivable lines even for businesses with existing liens. Companies should work closely with advisors like ClearThink Capital to identify lenders who can navigate these complexities and craft a workable solution.

Advantages of Accounts Receivable Financing

There are several reasons why accounts receivable financing has become a popular option for businesses looking to improve cash flow without incurring additional debt or diluting equity:

  • Improved Cash Flow: By converting unpaid invoices into immediate cash, businesses can cover operational expenses, invest in growth initiatives, and avoid financial disruptions.
  • No Equity Dilution: Unlike raising capital through equity financing, accounts receivable financing allows business owners to maintain full control of their company.
  • Fast Access to Capital: The approval and funding process for accounts receivable financing is typically much faster than traditional bank loans, making it ideal for time-sensitive needs.
  • Flexible Financing Options: Alternative lenders offer customizable terms to meet the specific needs of each business, providing greater flexibility than banks.
  • Growth Without Debt: Since accounts receivable financing is based on existing invoices, it allows businesses to grow without taking on long-term debt obligations.

Is Accounts Receivable Financing Right for Your Business?

For businesses with cash flow challenges due to delayed customer payments, accounts receivable financing can be a lifeline. However, it’s essential to carefully evaluate your company’s financial situation, customer base, and specific needs before pursuing this option. Partnering with an experienced advisor like ClearThink Capital can help you navigate the process, identify the best lenders, and secure favorable terms that support your growth objectives.

Accounts receivable financing offers a powerful tool for businesses to unlock the value of their unpaid invoices and fuel their growth. Whether you’re dealing with seasonal revenue fluctuations or need immediate cash to seize a new opportunity, this financing solution can provide the working capital you need to move forward with confidence. Contact ClearThink Capital today to explore how accounts receivable financing can support your company’s success.