Bridge Financing for Startups: What Founders Need to Know

Bridge financing is a short-term funding solution that helps startups address cash flow gaps, especially between funding rounds or during rapid growth. With venture capital funding slowing down and funding rounds taking longer (e.g., 22–28 months between rounds), many startups rely on bridge loans to stay afloat.

Key Takeaways:

• Purpose: Covers operational costs, marketing, inventory, or unexpected expenses.
• Options:
  • Convertible Notes: Short-term loans converting to equity later.
  • SAFE Agreements: Simplified equity agreements without interest.
  • Revenue-Based Loans: Non-dilutive funding tied to revenue.
• Costs: Higher interest rates (8–12%) and fees (e.g., origination, exit).
• Risks: Poorly planned bridge loans can harm future funding rounds.

Quick Comparison of Bridge Financing Options:

Bridge financing can extend a startup’s runway, support growth, and improve future funding terms when structured wisely. But founders must carefully plan repayment, avoid excessive dilution, and negotiate favorable terms to ensure long-term success.

Main Cash Flow Problems Startups Face

Cash flow is a critical issue for startups. In fact, studies show that 82% of small business failures are tied to cash flow problems, with 44% of startups failing due to cash shortages. These challenges often push startups to seek solutions like bridge financing.

Late Payments and Income Gaps

When clients delay payments, startups are forced to cover costs without the cash they need. This situation becomes even riskier for startups heavily reliant on a single client. For instance, those with over 30% of their revenue tied to one customer are especially vulnerable to cash flow disruptions.

"One of the toughest years my company had was when we doubled sales and almost went broke. We were building things two months in advance and getting the money from sales six months late. Add growth to that and it can be like a Trojan horse, hiding a problem inside a solution. Yes, of course you want to grow; we all want to grow our businesses. But be careful because growth costs cash. It's a matter of working capital. The faster you grow, the more financing you need."
– Tim Berry, Entrepreneur.com

Emergency Costs and Market Shifts

Unforeseen expenses and sudden market changes can deplete cash reserves quickly. Experts suggest keeping 3–6 months of operating expenses in reserve, but many startups find it challenging to maintain this cushion.

Time Between Funding Rounds

The time between funding rounds has grown significantly. For example, the gap between Series A and B now averages 28 months, the longest span since 2012. Other data highlights 844 days between Series A and B and 1,090 days between Series B and C. These delays create immense pressure for startups, especially those operating at a loss while chasing growth.

These obstacles highlight why startups often turn to financial tools like bridge financing to stay afloat.

Bridge Financing Benefits for Startups

Bridge financing is a practical solution for startups facing cash flow gaps. With most startups operating on a runway of 12–18 months, this type of funding can play a key role in keeping operations on track and supporting growth.

Extending Cash Runway

Bridge financing provides immediate access to funds, helping startups cover critical expenses like payroll, product development, marketing, and equipment costs. This ensures business operations continue smoothly during important growth stages, avoiding any interruptions.

Improving Future Funding Terms

Bridge financing can also strengthen a startup's position in future funding rounds. By using these funds to hit crucial milestones and performance goals, companies can showcase stronger growth and potentially secure better valuations. This strategy not only solves immediate cash flow issues but can also lead to more favorable terms in the next investment round. For example, when structured as convertible notes, bridge financing can reduce equity dilution and build stronger ties with existing investors.

Tailoring Financing to Your Needs

One of the advantages of bridge financing is the ability to customize terms to fit a startup's specific requirements. Common options include:

When structuring bridge financing, startups should focus on three key areas:

• Determining the Right Amount: Evaluate current financials, forecasted cash flow, and necessary expenses to calculate the required funding.
• Allocating Funds Wisely: Plan how the funds will be used - whether for operations, marketing, or development.
• Setting a Repayment Plan: Develop a repayment strategy that aligns with projected cash flow. This could include options like equity conversion or fixed repayment, depending on goals and investor preferences.

Firms like Phoenix Strategy Group specialize in helping growth-stage companies design financing plans that address immediate needs while supporting long-term goals. Their expertise ensures startups can secure funding that works for both the present and the future.

Bridge Financing Options for Startups

Startups have several ways to secure bridge financing, each tailored to different stages of growth and specific needs. Knowing these options can help founders craft a smart funding plan.

Using Convertible Notes

Convertible notes are widely used by early-stage startups. These are short-term loans that convert into equity during a future funding round. This approach allows startups to secure funding without diving into detailed valuation discussions right away.

For a simpler alternative without interest, look into SAFE agreements.

SAFE Agreements

SAFE (Simple Agreement for Future Equity) agreements are a straightforward option, especially for seed funding. Unlike convertible notes, SAFEs don’t have interest or maturity dates, making them easier to manage.

"While bridge rounds often carry negative connotations - such as implying the company is in financial trouble - that is not always the case. Bridge rounds might also provide an interim cash infusion to capitalize on rapid growth or prepare for an IPO." - AngelList

Why SAFEs work well:

• Streamlined legal terms
• No interest to track
• Flexible valuation caps
• Faster to close compared to other options

Revenue-Based Loans

Revenue-based financing (RBF) offers a non-dilutive alternative to equity-based options. With RBF, startups receive funding in exchange for a share of future revenue until a set repayment amount is reached. This approach works best for companies with steady revenue streams.

What to know about RBF:

• Works well for businesses with consistent monthly revenue
• Repayments adjust based on performance
• Doesn’t dilute equity
• Faster to secure than equity rounds

When choosing a bridge financing option, founders should consider factors like their stage of growth, revenue consistency, funding timeline, and willingness to dilute equity.

Phoenix Strategy Group specializes in helping growth-stage companies evaluate these options. By analyzing financial data and growth plans, they guide startups toward the best-fit bridge financing strategy to cover cash flow gaps and move toward the next funding milestone efficiently.

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What to Check Before Getting Bridge Financing

Before diving into bridge financing, it’s essential for founders to carefully examine the terms and potential impact on future funding.

Understanding and Setting Terms

Pay close attention to the terms of any bridge financing deal. Interest rates for bridge loans typically range from 8% to 12%, which is higher than traditional financing options. Beyond interest, make sure to review the full fee structure.

Another key point to evaluate is the inclusion of securities demand provisions. These clauses allow lenders to require the issuance of debt securities, which can lead to disputes during negotiations. Experts at Phoenix Strategy Group advise founders to negotiate clear limits on underwriters' rights and refine key economic terms. Doing this upfront lays the groundwork for understanding how bridge financing might influence future funding rounds.

Effects on Next Funding Rounds

Once you've set clear terms, consider how this financing might shape future fundraising efforts. Bridge rounds made up 60–70% of funding rounds in 2023–2024, so it’s critical to grasp their potential ripple effects.

"Offering lower bridge round valuations could put off future investors. While it may be necessary to offer lower valuations to bridge round investors to get the round done, this may deter future investors if they can't get the same favorable terms." - AngelList Education Center

Here are some aspects to keep in mind:

• Valuation caps on convertible notes reflect your company’s expected value.
• Terms given to bridge investors can set precedents for future deals.
• You’ll need to clearly articulate the reasoning behind your bridge round to attract future investors.

Short-Term vs. Long-Term Planning

When deciding between bridge financing and longer-term solutions, weigh your immediate needs against your broader goals. Traditional loans often come with lower interest rates but take more time and stricter qualifications. Bridge loans, on the other hand, offer quicker access to cash but at higher costs.

Consider these factors:

• How urgently you need capital
• Your ability to secure long-term financing later
• Whether you have assets available to use as collateral
• The effect on your flexibility for future funding

"Understanding the timing, structure, terms and range of outcomes under a bridge loan commitment is key to a successful financing negotiation and to analyzing the overall transaction economics." - McDermott Will & Emery

To reassure investors, align your exit strategy - whether through refinancing, equity, or hitting revenue milestones - with a solid repayment plan. This demonstrates a clear path forward and builds confidence in your approach.

How Phoenix Strategy Group Helps with Bridge Financing

Growth-Stage Company Services

Phoenix Strategy Group (PSG) provides tailored financial advisory services for growth-stage companies, focusing on securing funds and improving cash flow strategies. Over the past year, their portfolio companies have raised more than $200 million, thanks to PSG's strategic approach. By offering fractional CFO services alongside in-depth financial analysis, PSG ensures startups are well-prepared to secure bridge financing.

Here’s a snapshot of their key services:

These services lay the groundwork for strong financial systems, making startups more attractive to bridge financing providers.

Building Financial Systems

PSG builds financial systems that make startups stand out to lenders. These systems enable precise, data-driven planning through features like:

• Regular performance reviews using weekly financial metrics and Monday Morning Metrics
• Real-time synchronization of financial data
• Integrated financial models showcasing growth potential

"As our fractional CFO, they accomplished more in six months than our last two full-time CFOs combined. If you're looking for unparalleled financial strategy and integration, hiring PSG is one of the best decisions you can make." - David Darmstandler, Co-CEO of DataPath

Data-Based Financial Planning

Once robust financial systems are in place, PSG uses data-driven planning to refine cash flow projections and financing strategies. They employ advanced analytics and data engineering to help startups:

• Predict cash runway with better accuracy
• Pinpoint the best timing for bridge financing
• Calculate exact funding needs based on growth metrics
• Create realistic repayment plans

PSG also builds tools like ETL pipelines, data warehouses, and analytics dashboards. These tools allow startups to present clear, measurable evidence of their performance and growth potential to lenders. Having worked with over 200 companies, PSG has perfected the art of turning raw financial data into persuasive stories that address both short-term liquidity needs and long-term goals.

Bridge Financing: Key Takeaways

Bridge financing can be a crucial solution for startups facing cash flow issues. In 2022, 44% of startups failed due to running out of cash[1], highlighting how important it is for founders to approach this type of financing with careful planning.

Typically, bridge loans last between 6–12 months, while the average startup runway is around 12–18 months. Timing is everything - getting it right could determine whether your business thrives or struggles.

When evaluating bridge financing options, here are some critical factors to keep in mind:

These points outline the decisions founders need to make when considering bridge financing.

For startups considering this route, partnering with skilled financial advisors can provide valuable guidance. Firms like Phoenix Strategy Group specialize in financial planning and can help navigate the complexities of bridge financing.

Bridge financing isn’t just about solving short-term cash flow problems - it’s about maintaining momentum for future growth. Whether you're dealing with delayed payments, unexpected expenses, or gearing up for your next funding round, structuring bridge financing properly can support both immediate needs and long-term goals.

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