Bridge loan: what is it? Bridge Credit Notes have some features

Experts classify bridge loans as intermediate or auxiliary loans. Loans of this format are issued for a period of no more than a year at a fairly high interest rate to pay off the borrower’s current urgent obligations. Both individuals and legal entities are entitled to receive a bridge loan. faces.

Bridge loans are especially popular in the field of venture financing. Venture capital funding here refers to investing in high-growth businesses.

This type of investment is characterized by a high degree of risk; it is usually aimed at companies operating in high-tech areas, for example, in the IT sector. Issuing a bridge loan may be appropriate when a startup that has not yet achieved self-sufficiency has spent all the funds previously allocated to it and is waiting for new injections.

That is, a bridge loan is a real chance for a young promising company to reach a new round of investment.

Bridge loan as a form of venture financing

Startups typically receive bridge loans from investors who have supported the company financially in the past. In addition, there are many venture funds on the market for which bridge financing is their main specialization.

It is advisable to turn to such venture funds when other investors, for some reason, cannot provide additional money for development.

Situations when bridge loans (in this area they are usually called bridge notes) turn out to be literally the only source of finance are not so rare in modern practice. Moreover, the interests of the main venture shareholders and note holders sometimes strongly contradict each other.

And it is the holders of bridge notes who receive a formal advantage in such situations.

Among bridge loans for promising businesses, convertible debt notes have gained significant popularity. They have several differences:

1. Such notes can be redeemed at any time ahead of schedule without fees or penalties.
2. The interest rate on convertible notes is usually fixed and is paid directly at maturity. However, sometimes there is a floating interest rate.
3. Convertible notes are debt obligations that, under certain conditions, can be converted into shares of a startup company.

Before the bridge note is issued, all parties involved sign a preliminary agreement. This important document reflects the key agreements between the management of the borrower company and the creditors, in particular, it sets out the conditions for converting the note into shares.

It is carried out automatically (that is, upon the occurrence of a certain date or event) or at the request of creditors.

Annual rates on bridge notes traditionally do not exceed 8%. And if the holders transfer them into shares, then they are entitled to a discount equal to 5–15% of the market price of these same shares.

Under what conditions can a venture bridge loan be provided?

If the bridge note has collateral, the agreement also lists its contents. The following may serve as collateral:

• company assets and property;
• its copyrights and intellectual property.

Noteholders have the option to withdraw the agreed upon collateral if the financed company does not have sufficient funds available to do so at the maturity date of the bridge note.

The nominal amount of a debt note can be paid either in a single payment or in several equal tranches. Other financing schemes are also possible.

For example, this diagram: Lenders provide the startup with the entire agreed loan amount in advance, and the startup gets the opportunity to withdraw funds from the loan account in installments. Such conditions leave borrowers some room for maneuver. This is beneficial if the startup plans to use other financial sources in the near future.

Let’s say that a large order awaits him soon, the payment of which will satisfy his financial needs for a certain period. In this situation, it is not worth taking on additional debt obligations.

Bridge financing in other areas

Bridge loans are also often used in mortgage lending. Moreover, here they act as one of the variations of a standard residential mortgage.

Let's imagine the following situation: a person wants to sell his private home to buy more expensive residential real estate. In this case, he may well try to take out a bridge loan. What will this give him?

In fact, the benefit is obvious: a bridge loan will allow you to buy a brand new home without waiting for the sale of your current home.

And finally, in the news concerning global economic processes, you can often hear about bridge lending. For example, in July 2015, the media reported that the Eurogroup provided Greece with a bridge loan worth 7 billion euros during the financial crisis that erupted in that country.

This money was eventually used by the Greek government to repay other loans.

Experts classify bridge loans as intermediate or auxiliary loans. Loans of this format are issued for a period of no more than a year at a fairly high interest rate to pay off the borrower’s current urgent obligations. Both individuals and legal entities are entitled to receive a bridge loan. faces. Bridge loans are especially popular in the field of venture financing. Venture capital funding here refers to investing in high-growth businesses.

This type of investment is characterized by a high degree of risk; it is usually aimed at companies operating in high-tech areas, for example, in the IT sector. Issuing a bridge loan may be appropriate when a startup that has not yet achieved self-sufficiency has spent all the funds previously allocated to it and is waiting for new injections. That is, a bridge loan is a real chance for a young promising company to “hold out” to a new round of investment.

Bridge loan as a form of venture financing

Startups typically receive bridge loans from investors who have supported the company financially in the past. In addition, there are many venture funds on the market for which bridge financing is their main specialization. It is advisable to turn to such venture funds when other investors, for some reason, cannot provide additional money for development.

Situations when bridge loans (in this area they are usually called bridge notes) turn out to be literally the only source of finance are not so rare in modern practice. Moreover, the interests of the main venture shareholders and note holders sometimes strongly contradict each other. And it is the holders of bridge notes who receive a formal advantage in such situations.

Among bridge loans for promising businesses, convertible debt notes have gained significant popularity. They have several differences:

1. Such notes can be redeemed at any time ahead of schedule without fees or penalties.
2. The interest rate on convertible notes is usually fixed and is paid directly at maturity. However, sometimes there is a floating interest rate.
3. Convertible notes are debt obligations that, under certain conditions, can be converted into shares of a startup company.

Before the bridge note is issued, all parties involved sign a preliminary agreement. This important document reflects the key agreements between the management of the borrower company and the creditors, in particular, it sets out the conditions for converting the note into shares. It is carried out automatically (that is, upon the occurrence of a certain date or event) or at the request of creditors.

Annual rates on bridge notes traditionally do not exceed 8%. And if the holders transfer them into shares, then they are entitled to a discount equal to 5–15% of the market price of these same shares.

Under what conditions can a venture bridge loan be provided?

If the bridge note has collateral, the agreement also lists its contents. The following may serve as collateral:

• company assets and property;
• its copyrights and intellectual property.

Noteholders have the option to withdraw the agreed upon collateral if the financed company does not have sufficient funds available to do so at the maturity date of the bridge note.

The nominal amount of a debt note can be paid either in a single payment or in several equal tranches. Other financing schemes are also possible.

For example, this diagram: Lenders provide the startup with the entire agreed loan amount in advance, and the startup gets the opportunity to withdraw funds from the loan account in installments. Such conditions leave borrowers some room for maneuver. This is beneficial if the startup plans to use other financial sources in the near future. Let’s say that a large order awaits him soon, the payment of which will satisfy his financial needs for a certain period. In this situation, it is not worth taking on additional debt obligations.

Bridge financing in other areas

Bridge loans are also often used in mortgage lending. Moreover, here they act as one of the variations of a standard residential mortgage. Let's imagine the following situation: a person wants to sell his private home to buy more expensive residential real estate. In this case, he may well try to take out a bridge loan. What will this give him? In fact, the benefit is obvious: a bridge loan will allow you to buy a brand new home without waiting for the sale of your current home.

And finally, in the news concerning global economic processes, you can often hear about bridge lending. For example, in July 2015, the media reported that the Eurogroup provided Greece with a bridge loan worth 7 billion euros during the financial crisis that erupted in that country. This money was eventually used by the Greek government to repay other loans.

I read a small book, Bridge Over Troubled Wall Street: How To Avoid Wall Street and Beat the Banks, which describes an interesting investment idea. It is based on bridge loans for the construction and renovation of real estate.

Bridge loan (from the English bridge loan - intermediate or auxiliary loan) is a short-term loan issued for a period of up to one year at an interest rate exceeding the bank interest rate to cover the borrower's current obligations.

Many companies are faced with the fact that they cannot get a loan from a bank. It is precisely these companies that bridge loans are designed for. For example, a shopping center wants to expand, a hotel wants to renovate, but the bank won’t give them a loan. They apply for a bridge loan for a year, after which they re-evaluate the property and refinance from the bank at a lower interest rate.

The author of the book "Bridge Over Troubled Wall Street: How To Avoid Wall Street and Beat the Banks" - Stephen Gardner - represents one of the companies that provides bridge loans for the construction, renovation and expansion of commercial real estate. They provide bridge loans only to companies with a stable cash flow. The property is assessed by two independent appraisers. The property itself can only be credited for no more than 65% of its value, which protects the investor from falling property prices. When receiving a loan, the property is pledged as collateral, and Stefan Gardner’s company should be in the first line of debtors. Thus, if, for example, when renovating a hotel, the company fails to repay the loan, then the lender gets the hotel itself (even if its value is much higher than the loan debt). The company also states that it has an insurance fund, which in any case guarantees payments to the investor.

As of 2015, an investor can earn 5-7% per annum in US dollars. The only additional cost is a fixed amount of $200-250 for preparing tax documents. Stephen Gardner boasts that, unlike investing in the stock market, be it mutual funds or other investment management methods, commissions do not eat into your income. Many people don't really think about the fact that investment management costs a huge amount of money, even from American 401k retirement accounts. In this case, the management fee is charged regardless of whether the investment brought profit or loss. Over 10-30 years, such a percentage can eat up a significant part of the savings.

It is clear that Stefan Gardner's company does not work for free. But the advantage, of course, is that the investor himself can choose the objects in which to invest, and can also go and see them. And if the contract specifies an income of 5% or 7%, then this is exactly what the investor will receive. More precisely, income is paid monthly during the contract period (usually one year). Then you can withdraw the invested amount, or you can invest it again, including with accumulated interest. The company itself also invests in the same objects, but after the investors.

Providing bridge loans on such conditions allows you to earn a stable income. Risks are minimized thanks to collateral in the form of commercial real estate, as well as the provision of loans to stable businesses. Unlike the stock market, which can have ups and downs.

Compared to investing in commercial and residential real estate, these investments have a huge advantage. The investor does not need to search for tenants, as well as repair and maintain the properties.

In the book, the author repeatedly scares with low interest rates on deposits and certificates of deposit recently. In the USA they do not bring even half a percent per annum. It also frightens the stock market, including the two-fold fall in 2008 (to win back a 50% drop, you need to earn as much as 100%).

Stephen Gardner says that banks deliberately withhold information about bridge loans so that ordinary investors cannot make money on them. Moreover, such an approach as in his company makes investments very, very safe.

Honestly, when I read about how bad other methods are and how good the one offered by a particular company is, I immediately wonder if this is a scam. Moreover, large financial publications did not write about Stefan Gardner’s company, and he is not visible on business television channels. It is quite possible that Your Bridge Plan operates honestly in the market and pleases its investors. But of course, investing 100% of your retirement savings (including from American Self-Directed IRA accounts, which many emigrants from Russia know nothing about) would be too risky, no matter what arguments the author makes in his book.

Bridge financing — As a rule, bridge loans are obtained from an already established syndicate of investors who financed the company at previous stages. In addition, there are special venture funds. Providing loans in the form of bridge financing is their specialization. A company can resort to the help of venture funds in cases where previous investors are not able to provide additional capital.
Bridge financing is usually provided in the form of bridge notes, with the help of which the company can survive until the next round of venture financing. Upon completion, the notes must be paid and redeemed.
For successful companies, bridge financing is an important step towards the next round of financing. It guarantees that not only new but also existing shareholders will participate in the new round. However, it happens that a company experiences difficulties in attracting additional share capital. Bridge notes are the only source of financing. The interests of noteholders and shareholders may not coincide, with preference given to holders of debt notes.
When financing a company using bridge notes, the most common are convertible promissory notes. They can be repaid ahead of schedule at any time without additional premium or penalties.
Interest on the notes generally accrues and is payable upon maturity. In some cases, the interest rate may be floating; its size can be formulated as follows: “bank loan rate + 1 percent.”
Convertible notes, on the one hand, are debt obligations. But at the same time they can be converted into shares of the company. Before the start of the bridge financing campaign, the parties draw up a preliminary agreement (Term Sheet). This document records the main agreements between the company's management and creditors, including the conditions for converting bridge notes into company shares. It is carried out either automatically (when a certain event occurs) or at the request of the holders.
Since notes may have collateral, the preliminary agreement lists the contents of the collateral. It can be formulated quite broadly (all property (assets) of the company, including its intellectual property). Or you can indicate specific assets (objects) of the company. If the maturity date of the notes arrives and the firm has no funds and cannot reach new agreements with creditors, then the creditors have the right to take the collateral.
The face amount of the notes may be paid to the company in one lump sum or in several tranches. Financing terms can be structured differently. Lenders agree to provide a nominal amount to the company, and the company can then borrow in multiple installments as needed. Such conditions leave the company room for maneuver. For example, if it is waiting for an opportunity to use other sources of liquidity. Let's assume that the company is about to receive a paid order that will temporarily satisfy its financial needs. In such a situation, you should not take on additional debt obligations.
The nominal value of the notes (the body of the loan), as well as the accumulated interest, can be converted at the investor's request into a certain number of real shares of the company. And at a discount from the price. At the option of investors, the debt notes can be converted into “future” shares, which are expected to be issued in the next round of financing.

Andrey asks

Good day, Andrey! Yes, it is issued to individuals.

What is a bridge loan, and can it be issued to an individual?

For example, you like a new house, but you don’t have the money to buy it. You need to sell your old house in order to buy a new one with the money you receive. But you or the seller don't want to wait for it to sell. A bridge loan makes it possible to buy a new mansion before the old one is sold.

An example of a bridge loan is the seven billion (7.16) loan to Greece through the EFSM to save Hellas from "immediate default".

Of course, Greece is not an individual, but such loans are also issued to individual citizens. Use the services of a specialized service, and it will select for you domestic financial organizations that issue such a loan:

And we will tell you about Orange Bank (head office in St. Petersburg), which offers clients a bridge loan. The loan amount ranges from 1-50 million rubles. The loan is issued at 23% (minimum) for a period of 4 to 12 months.

The requirements for the borrower are as follows:

Age – within 23-65 years;
Work experience – at least three months at the last place of employment;
Confirmation of income - request to the employer, certificate in the form of a financial organization, certificate 2-NDFL.

Russian citizenship is not a mandatory condition. For documents, along with a completed application form, it is enough to present your passport.

It should be understood that a bridge loan should be taken out when the purchase of a new property can be paid for with funds from the sale of the old one.

Additional information (place of conclusion of the agreement, early repayment, time of loan issuance) can be obtained by contacting bank employees.