Bridge Loans-Bridge to Nowhere
About every 3-6 months I get a call from an entrepreneur looking for a bridge loan to tide his company over until his financing closes. The financing can be a round of venture capital, a bulletin board listing or a loan from a private equity firm or hedge fund. The type of financing changes from call to call but the "closing" is always just 2-4 weeks away, as soon as we (fill in the blank). The pending item is always a routine item such as due diligence, an audit report, legal contracts, verification of customers or background checks. The pending item or answer is never:
- We ran out of cash because we got distracted by the financing and did not have time to manage the business
- We underestimated the expenses to get to closing and used up all our surplus working capital
- We did not think they would discover the SEC action against the second largest shareholder and we have to start the process all over again with new funding sources
- I just need to get my existing shareholders to restructure their loans to the company and take a 30% haircut
(I have seen all of these be the real reason the company needed the bridge, and the take out financings were all a dream in the entrepreneur's mind.)
My experience is that if you are dealing with reputable funding sources, the deal is moving to a closing, and the cash shortage is not due to mismanagement, the funding source will bridge you (albeit at a price). Secondly, bridge loan requests always come from companies that are perpetually raising capital (another sign of problems). Thirdly, bridge loans always seem to involve some third party consent or agreement which has not been obtained (after 6-18 months of trying).
Seeking a bridge loan from a third party is almost always a sure sign of trouble at a company. I have always advocated raising plenty of capital and raising your next financing well in advance of needing it. If you do this, you will not be calling me to arrange a bridge loan and I will not have to tell you that you have no take out for the bridge loan.
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