Methods of bridging finance for companies

All businesses throughout their journeys, whether as start-ups, SMEs or otherwise, will constantly face unique sets of challenges; anticipating the servicing of their financial runway often tops their lists.  For founders, business owners or management teams, understanding the different avenues for raising interim capital is instrumental for laying the foundation of businesses, irrespective of how well-established the company is.  Here, we briefly introduce three options which can be implemented either independently to raise capital or, as we commonly see, as bridging finance before a company’s next substantial financial injection.

1. Convertible Loan Notes: This method offers flexibility to both the business and the investors. Investors provide funds to the company in the form of loans, which can convert into equity at a later stage with an effective discount, usually during a subsequent funding round. However, convertible loan notes also enable an investor to be repaid (often with substantial interest). Convertible loan notes provide short-term capital while deferring the valuation discussion to a later date, offering the business time to prove its value and, as a result, potentially secure a more beneficial valuation.
2. Advanced Subscription Agreements: These agreements enable businesses to secure upfront investment, with investors committing to share subscriptions in the future at a predetermined, typically discounted, price. This method provides certainty for both parties, allowing the business to secure capital immediately while the investors gain potential future equity at a discounted rate, motivating early support for the Company. Securing funding in this manner can legitimise and increase the value of the business and encourage further investment.
3. Further Issue of Shares: Issuing further shares to existing investors or new shareholders is another available option to businesses. Such a method typically results in dilution of ownership stakes of existing shareholders and implementation has certain operational and legal costs involved. However, it remains the most common form of equity fund raising for businesses.

Considering and understanding the nuances of each financing method and their implications on the business and its ownership structure is a critical step for any business. Moreover, building a network within the fundraising and financing ecosystem and seeking appropriate guidance can provide invaluable insight on the future and success of the business.

Should you require further details on any of the above financing methods, their implementation or how they compare against each other in greater detail, please contact Jamal Saleh, Henry Wright or another member of our Corporate team.

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