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Bridge Loans

avc.com

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Re: Bridge Loans

#21

Post by icelancer »

My small business (not really a startup) has used bridge loans responsibly and very effectively. One area where they're quite useful and common are when you have inventory you want to finance, often in a burst or when a sudden demand shock hits and speed is of the essence.

(We currently have a large rotating LOC with a bank, but this is not always practical when you're a startup/small business getting going)

Paying tons of cash out the door to buy inventory to meet demand over X days while it sits in your warehouse is very often less efficient than paying even ridiculously high APRs on bridge loans. Cash flow is a consideration just as raw ROI / profit margins are, especially for smaller businesses.

Yes, many bridge loan issuers are preying on uninformed / underbanked people. I won't deny that. But in the small commercial space, bridge loans are used effectively, responsibly, and regularly without abuse - especially for those carrying hard inventory.

Re: Bridge Loans

#23

Post by ptero »

spamizbad wrote: post #16
bArray wrote: post #12

Earlier quoted context omitted.

> Oh, I remember when these were popular for dot-com who just needed to get to the next round. One of the best skills to learn is when to stop throwing good resources after bad. Sure, maybe you need just a little more to get over the finish line, but more than likely you are just investing more resources into delaying failure. People often bring up Elon Musk and Tesla as a positive example of perseverance, where he w…

Gas and food prices would likely drop like a stone if we are facing another 2008-like crisis. A handful of people made a big bet that during the credit crunch we’d see massive inflation and took big bets against the dollar and cheap oil and lost their shirt

> Gas and food prices would likely drop like a stone if we are facing another 2008-like crisis.

Not necessarily. For deflation to occur, especially in staple goods (for which demand is sticky) in addition to stable or contracting money supply (M2) you need significant supply side growth. Neither is certain. I personally doubt that politicians will hold the purse closed at a time when lower and middle income voters are stretched thin. Deflation-causing policies also tend to lower tax revenues.

My bet instead is that crisis or not we will likely see debt deflation via below inflation interest rates. Just a personal position, I do not have a crystal ball.

Re: Bridge Loans

#24

Post by alberth »

icelancer wrote: post #21

My small business (not really a startup) has used bridge loans responsibly and very effectively. One area where they're quite useful and common are when you have inventory you want to finance, often in a burst or when a sudden demand shock hits and speed is of the essence. (We currently have a large rotating LOC with a bank, but this is not always practical when you're a startup/small business getting going) Paying t…

Maybe I’m misunderstanding but what you’re describing sounds a lot like a “credit line” to address cash flow issues.

But what Fred is describing is financing to bridge to either a liquidation event or another around of funding.

Re: Bridge Loans

#25

Post by Animats »

alberth wrote: post #24
icelancer wrote: post #21

My small business (not really a startup) has used bridge loans responsibly and very effectively. One area where they're quite useful and common are when you have inventory you want to finance, often in a burst or when a sudden demand shock hits and speed is of the essence. (We currently have a large rotating LOC with a bank, but this is not always practical when you're a startup/small business getting going) Paying t…

Maybe I’m misunderstanding but what you’re describing sounds a lot like a “credit line” to address cash flow issues. But what Fred is describing is financing to bridge to either a liquidation event or another around of funding.

That's similar to factoring, where you're borrowing against your inventory. Common in apparel.

Re: Bridge Loans

#26

Post by Animats »

asah wrote: post #19

The comments here seem to forget that financing is ESSENTIAL to startups - even profitable ones. As a reminder, 99% of the marketcap (value) of a startup is its growth, not its present size/revenue/etc. By mathematical definition, a startup cannot fund fast-enough growth on current profits and therefore requires financing and a lot of it. You finance a startup with a mix of VC and debt. As the business becomes less s…

"As a reminder, 99% of the marketcap (value) of a startup is its growth, not its present size/revenue/etc. By mathematical definition, a startup cannot fund fast-enough growth on current profits and therefore requires financing and a lot of it."

Autodesk did. Initial investment was $60K by the founders, and the company was profitable early on.[1] No VCs were involved. There were discussions with some VCs, and they were very funny. "In addition, the overall flavour of the deal seemed to us totally inappropriate for a company which was, at the time of these negotiations, generating sales equal to the size of the deal every month and generating after-tax profits close to the size of the deal every quarter." The VCs assumed they had a stronger bargaining position than they did.

The VC involved turned down a deal to invest about $500K for 10% of the company. Autodesk's market cap today is $47 billion.

[1] https://www.fourmilab.ch/autofile/e5/

Re: Bridge Loans

#27

Post by [deleted] »

asah wrote: post #19

The comments here seem to forget that financing is ESSENTIAL to startups - even profitable ones. As a reminder, 99% of the marketcap (value) of a startup is its growth, not its present size/revenue/etc. By mathematical definition, a startup cannot fund fast-enough growth on current profits and therefore requires financing and a lot of it. You finance a startup with a mix of VC and debt. As the business becomes less s…

[deleted]

Re: Bridge Loans

#28

Post by Kon-Peki »

com2kid wrote: post #17
bArray wrote: post #12

Earlier quoted context omitted.

> Oh, I remember when these were popular for dot-com who just needed to get to the next round. One of the best skills to learn is when to stop throwing good resources after bad. Sure, maybe you need just a little more to get over the finish line, but more than likely you are just investing more resources into delaying failure. People often bring up Elon Musk and Tesla as a positive example of perseverance, where he w…

> You wait, this bubble is about to pop. Not a great time to have large financial obligations. The people buying these houses have good financial means, when I bought in 2021 the bank looked through all my finances in depth, and they were super conservative about everything. For example, I own an existing townhome, before agreeing to give me a new mortgage, the bank made me show a signed contract with a tenant for my…

After every crash, people make fun of all the folks that said "this time is different". Maybe that will happen again. And maybe not - or maybe there is no crash at all.

I, for one, am truly perplexed. Some things look awful and some things look great. If there is a crash, perhaps it will provide clarity so we can look back and say "it wasn't any different this time".

Re: Bridge Loans

#29

Post by keithwhor »

Yikes. I feel like this is a smart way to bury the lede;

> A very important consideration in structuring a bridge loan is what happens if the company is sold when the note is outstanding. […] I like somewhere between 2x and 3x depending on the circumstances.

Slippery slope; Fred just gave ammunition to a whole bunch of firms to start negotiating liquidation preferences on term sheets, for which the “standard” has been 1x for years.

Re: Bridge Loans

#30

Post by sixhobbits »

> New investors strengthen the investor syndicate which makes the company more resilient. New investors bring new ideas, new experiences, and new sources of funding to the business.

uh, citation needed? Investors aren't meant to be there to bring 'ideas and experiences', and adding new ones to a company that isn't doing well feels like it would just add more tension and disagreement when what is probably needed is a laser vision that hopefully the founding team should be providing..

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