Start-ups see bridge loans falling down

Banks are shunning bridge loans aimed at helping young companies--another blow to start-ups that have seen funding from VCs and IPOs vanish.

Dawn Kawamoto Former Staff writer, CNET News
Dawn Kawamoto covered enterprise security and financial news relating to technology for CNET News.
Dawn Kawamoto
2 min read
Bankers are increasingly turning down bridge loans aimed at helping young companies--yet another blow to entrepreneurs who have seen traditional funding from venture capital firms and IPOs dry up.

Bridge-loan terms require a company to pay back the loan as soon as it receives its next funding round, sells the company or launches an initial public offering.

"Bridge loans are a casualty of the markets, because equity is harder to raise and equity is what takes the loan out," said John Merhaut, marketing director with Transamerica Technology Finance and a panelist Tuesday at VentureOne's Best of Breed in Venture Capital Summit in San Francisco, Calif.

Venture debt banks, unlike venture capitalists, provide loans to young companies in exchange for interest and warrants that convert into stock. Venture capitalists provide funding for a stake in a company. Traditional banks, meanwhile, tend to deal with more mature companies.

But companies without any receivables have few options for financing, venture debt bankers say.

One option is the popular equipment loan, which is similar to taking out a car loan, in which default results in repossession of the equipment. Another is senior term loans, in which all the company's assets, from furniture to intellectual-property patents, are held in collateral.

Bridge loans, once much easier to get, are now generally reserved for companies with a track record.

You should have money before you borrow it
"Companies that have received at least a (first round) of venture funding have a chance of getting a loan from a venture debt bank," Merhaut said.

Today, entrepreneurs should follow the old adage of seeking a loan when they have plenty of cash, Merhaut said, securing a loan within six months of receiving their first venture round.

"You either have to have a lot of cash or articulated support from a VC," said Quentin Falconer, senior vice president of Silicon Valley Bank.

Once a company builds up a customer base and is healthy, it can turn to traditional banks that offer more favorable interest rates. But companies strapped for cash often don't have that option.

That's when factoring loans may come into play, Falconer said.

"We may lend to a company that has one month of cash but quality receivables. With factoring, the receivables are paid directly to the bank," he said.

Entrepreneurs are facing more hoops to jump through with venture debt banks, but the advantage of debt is the ability to retain more ownership in the company.

"I have less dilution with a bank than a VC, but a bank won't take care of all my funding needs," said Jeffrey Ginsberg, chairman of integrated-communications provider Eureka GGN. "It's not a long-term solution, but a short-term fix."