At some stages in the life of a business, what makes the difference is not only having access to capital, but doing so quickly and with sufficient flexibility. That is what the  bridge financing, also known by the Anglo-Saxon term "bridge loan" o "bridge financing": a short-term loan solution to cover immediate liquidity needs while waiting for more structured resources. Its function is to "throw a financial bridge" pending a subsequent recapitalization, the provision of a longer-term loan, or the occurrence of another liquidity event.

Among the options for obtaining bridge financing today is the lending crowdfunding: In this article we find out what bridging finance is and how it works, when it is useful to use it, and how it can be done with crowdfunding.

What is bridge financing

Bridge financing is a form of short-term financing, designed to support a company at a time of transition. Its goal is to fill a "liquidity gap" while waiting for a larger, longer-lasting, or more convenient source of capital already in the pipeline or in the works to become available: for example, a public tender, a new bank line of credit, a capital increase, or the closing of an equity crowdfunding campaign.

The main features of bridge financing are:

• Limited duration (usually 6-18 months)
• Specific and temporary purpose: "to act as a bridge" (to bridge) between a need for immediate liquidity And an expected and well-identified future funding source or liquidity event
• Higher interest rate than traditional credit, offset by speed of disbursement
• Reduced or no guarantees, especially if structured in an alternative form

Thus, it is not a suitable solution for structurally covering financial needs, but a tactical tool for not slowing down strategic operations due to bureaucratic timelines or operational constraints: it allows avoiding operational disruptions, seizing investment opportunities or meeting financial commitments that cannot be deferred.

When bridge financing is useful

The bridge financing can be useful in a variety of entrepreneurial circumstances. The most common include:

• Waiting for the disbursement of public funds already awarded (e.g., regional or national calls) or tax incentives.

The time between notification of winning a bid and actually receiving the funds can be long. A bridge loan allows this cash to be advanced, enabling the company to start the project or incur ongoing expenses without waiting for bureaucratic delays.

• Anticipation of specific expenses for work with tight timelines (e.g., a building renovation)
• Phase of equity crowdfunding pre-campaign, to fund preparatory and marketing activities
• Waiting for the disbursement of capital raised in equity crowdfunding

During the campaign period and the following one, a business needs liquidity to continue operating and growing. Bridging financing can cover this need, "ferrying" the company until the deal closes. The same is true for any traditional financing rounds.

• Phase between two investment rounds to avoid slowdown in project development
• Coverage of the time gap between the collection of a sale and the opportunity for a subsequent investment or Pre-financing of acquired orders, pending collection

Companies may face large orders that require significant cash advances to purchase raw materials or cover production costs. Similarly, payment delays from major customers can put a strain on company liquidity. In these scenarios, fast bridge financing can provide the flexibility needed.

• Starting a new business project, waiting to start generating profit and/or attracting investors

When a company identifies an investment opportunity, such as starting a new production line, entering a new market, or developing a new product, it needs start-up capital. If a return on investment is expected in the short or medium term that can cover the repayment of the loan, a bridge loan can be a viable solution.

In all these cases, access to immediate capital can make the difference between seizing an opportunity or letting it slip away. 

Bridging loan with traditional finance

The delivery mechanism of a traditional bridge financing is typically done through banking institutions. The amount granted is contingent on the submission of documentation showing the expected liquidity event or the construction progress (SAL), in construction, or even the contractual agreements and business plan of the acquisition for which financing is sought. 

The appraisal process can be lengthy: banks, by their nature and the regulatory constraints to which they are subjected, adopt creditworthiness assessment processes that require specific timeframes and conspicuous documentation, unsuitable for times of financial urgency.

In addition, due to its short-term nature and perceived risk profile, interest rates charged on bridging loans can be higher than those of longer-term forms of financing.

Within traditional finance, there are also other similar solutions that play a bridging finance role, for example:

• Cash overdraft (revolving line of credit granted by the bank on the current account, which allows the firm to use funds beyond its liquid assets, up to an agreed limit)
• Factoring (assignment of invoices to be collected to a specialized company in exchange for immediate liquidity to the extent of a percentage of the amount of invoices assigned).

To these solutions should be added the alternative solution of lending crowdfunding.

Bridge financing with lending crowdfunding

Lending crowdfunding allows businesses to Getting a loan from a plurality of online investors, through regulated platforms. The company then repays the principal received according to an agreed repayment schedule, including interest.

Using lending crowdfunding to structure bridge financing offers some distinctive advantages.

1. Increased agility and speed of access

Le lending crowdfunding platforms, in fact, they operate with streamlined digital processes and rapid assessments, and the campaign can take as little as 30 days, following which disbursement of capital occurs in a short time. In many cases, the capital can be available in as little as a month, a crucial aspect of bridge financing.

In terms of cash flow management, lending crowdfunding platforms generally use licensed third-party payment or electronic money institutions to process investor deposits and subsequent disbursements of funds to applicants.

2. Appetizability for small investors

The existence of a certain liquidity event in the company's future significantly lowers the perceived risk for small savers considering a crowdfunding investment. There is already the prospect of capital with which the company can repay the loan. This makes it easier to communicate for the crowdfunding campaign and persuade potential investors.

3. Flexibility

This instrument, compared to a bank loan, offers greater flexibility in structuring the financing, adapting better to specific needs. The funds raised can be used for a variety of purposes, from starting new projects to expanding business or consolidating working capital.

The interest rate is on average higher than that of a bank loan because of the speed of disbursement and the inferiority of barriers to entry.

For apply for crowdfunding bridge financing, the process is the normal one for lending crowdfunding campaigns: the company must submit updated financial statements and accounting records, business plan, documentation on the expected liquidity event, and any collateral or ancillary commitments. In this context, the crowdfunding platform not only assesses the company's current creditworthiness, but extends its analysis to the soundness and likelihood of realization of the future liquidity event that is expected to pay off the bridge loan.

The bridge financing for startups

For startups, a bridge loan obtained through lending crowdfunding can also take on strategic value beyond simply covering a liquidity need. It can serve as a "signaling" (market signaling) and "commitment" mechanism. Get A bridge financing pending a larger equity round can indicate to the market and to prospective institutional investors that the company has already passed a first round of evaluation (the one carried out by the crowdfunding platform and the investors who participated in the bridge loan) and that it has a credible plan to achieve the milestones necessary for the next round of financing. It can, in addition, demonstrate management's determination and proactivity in finding solutions to sustain growth. 

It is important to note, however, that excessive or repeated reliance on bridge financing could also be interpreted negatively, signaling potential difficulties in closing the main financing round or suboptimal financial management.

The case of the real estate sector

Many of the situations we have described in which bridge financing comes in handy occur in the real estate sector. Indeed, real estate transactions are lengthy and expensive, often depend on multiple sources of financing with different timelines, have to meet crucial deadlines for issues of permits, licenses, incentives, etc., or depend on the purchase of property or land for which there are multiple interested buyers and for which large amounts of capital are needed.

I bridge financing are frequently used to finance the purchase of a property for renovation and subsequent resale, covering the period between acquisition and final sale.

Another common use is the advance of funds for the start-up of a construction site, pending the disbursement of tranches of a loan based on the State of Work Progress (SAL) by a banking institution. The cyclical and phased nature of construction projects makes bridge financing a particularly suitable instrument for this sector.

For this reason, too, lending crowdfunding applied to real estate is a particularly dynamic segment: we talked about it in our article on the real estate crowdfunding.