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What Startups Should Know About Bridge Loans

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Uncertainty continues to reign in the business world following the pandemic, and the high inflation rates are only serving to complicate things for businesses. Many of your small business clients, including startup owners, want to know how they can get more cash. Bridge loans are a popular and suitable choice -- if utilized properly.

Jun 7th 2022
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Bridge loans are a popular way for startups to ensure they have enough cash. Here's what you and your clients should know about them.

Startup companies progress through various stages of raising outside capital as they grow. This often starts with seed funding from founders and/or angel investors, progresses into various rounds of equity financing rounds from venture capital and/or private equity, and often ultimately leads to an initial public offering (IPO).

As companies journey through this financing life cycle, it’s common for them to utilize bridge loans at some point to “bridge” liquidity needs in between financing rounds.  Many bridge loans deliver a host of complex accounting issues that commonly get overlooked. As companies go through the IPO process, they’re often required to revisit their accounting of these financial instruments. 

In this article, I’ll highlight some of the common bridge loan terms that give rise to accounting complexities. 

Common Bridge Loan Structure

Bridge loans typically have short-term maturities of one year or less. Since bridge loans are provided when a company is at risk of meeting its liquidity requirements, they carry substantial default risk. As a result, investors often require a higher investment return for their exposure to this credit risk.

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