Entrepreneurship is the driving force of any economy. Start-ups often provide employment for people and contribute towards economic growth. While this is very admirable, it isn’t always the easiest thing to achieve. Being an entrepreneur goes beyond just taking a risk, but also involves a significant amount of work in terms of sourcing finance.
Capital needs often top the list of many start-ups. This financing isn’t always readily available and is highly important for operational needs.
While it may be possible to apply for funding from banks, this may not always be the most viable option. For this reason, many start-ups are opting for bridging finance solutions.
Trends often indicate that start-ups who have raised venture capital need another round of financing and turn to their existing investors to give them money before raising money from outsiders. This may often happen when the next round of money from new investors doesn’t arrive as quickly as projected.
This is where bridging finance for start-ups may come in quite handy.
This form of financing is considered to be a quick and inexpensive method of start-up companies to raise money from angel investors.
It eventually needs to be repaid if another round of financing doesn’t occur.
Bridging financing for start-ups is often used to extend the life of a struggling start-up whose future is unknown. The traditional way that this financing is offered is in the form of convertible debt. This investment usually does not have a valuation placed on it. How it works is that it usually starts as a loan that is later converted to equity at the time of the next financing.
In South Africa, the Small Enterprise finance Agency (SEFA) provides this short-term loan to enterprises in order to finance their working capital needs.