On occasion, in the middle of running your business, you’ll run across an opportunity so good you can’t pass it up. The deal costs too much to finance from your own balance sheet, but it just makes sense. Now what?
The answer is bridge financing – otherwise referred to as swing loans, interim loans, or gap financing. It is a short-term loan that you expect to repay with the proceeds of an anticipated larger transaction, allowing you to complete an opportunistic deal.
For middle market companies, sometimes bridge financing can be a perfect solution, as one of our Members found out recently.
One of the companies I was working with a few months ago was a company manufacturing packaging for consumer products. They were helping companies transition from petroleum-based plastics to more environmentally-friendly solutions, helping their clients become more sustainable and lowering their costs. The company, we’ll call them BioPlastics Inc, had significant marketing advantages and was growing quickly.
Over the previous 12 months, BioPlastics had tripled its revenues to nearly $10M. In order to take advantage of the situation, they had decided to find strategic partners to bring on growth equity. Knowing their business targets, they anticipated raising $6-8M in over the next 18 months.
However, as the company started fundraising the CEO was approached with an opportunity to acquire a smaller packaging company. The opportunity seemed perfect. The smaller company’s location and additional equipment would allow BioPlastics to keep up with the demands of growth. A quick merger would be more effective than trying to build out their own facilities after a fundraise, plus the smaller company’s culture was a perfect match with the business.
Unfortunately, the CEO had only 90 days to act. Since BioPlastics wasn’t yet in talks with investors, it didn’t have a line of sight on excess capital. Additionally, BioPlastics’ balance sheet didn’t support making the $4-5M acquisition. They had to find a solution or risk losing the deal to another buyer.
The Leveraged Bridge
The CEO had a few options, the first of which was to run the deal as a leveraged acquisition. Between the manufacturing facility assets and the expected additional profits, lenders were willing to give BioPlastics the capital to finance the deal.
However, the sellers were skittish. Afraid of selling to someone where the financing might fall through, they wanted proof that BioPlastics had the capital to make the acquisition.
Since BioPlastics’ loans were dependent on making the acquisition, the CEO needed another solution. Working with short-term lenders, he could get a commitment for a 180 day loan for $5M — a bridge loan. With the proof of funds, he would be able to make the acquisition and then refinance the short-term loan into longer term asset-backed loans and revolvers to run the newly acquired facilities.
A Bridge to Equity
The second option for the CEO avoided a leveraged deal entirely. The business was growing rapidly, so he didn’t want to take on any more debt than necessary. While raising more capital as part of their on-going equity raise would make the most sense to cover the acquisition, BioPlastics was at least 6 months away from finishing the raise.
So the CEO worked with a short-term lender to structure a $5M loan with a 9 month term. The loan covered the acquisition of the company plus operating expenses to get the business fully integrated. The loan was able to “bridge the gap” between the acquisition date and the equity capital raise that was used to pay back the bridge loan.
Bridge financing is a great way for smaller businesses to finance an acquisition or other short term need while they secure longer term financing. While traditionally used between equity rounds for startups or preparing for an IPO, more and more middle market businesses are using bridge financing to take advantage of unique opportunities to grow their businesses.