How startups use bridge financing

What Is Bridge Financing?

Bridge financing is funding that covers a temporary funding gap. The name comes from its purpose: it bridges the time between your current cash position and your next major funding milestone – whether that's an equity round, profitability, or a strategic transaction.

For startups, bridge financing typically ranges from €100,000 to €3M and lasts 6 to 36 months. Unlike venture capital, you retain full ownership and control. Unlike traditional bank loans, bridge financing providers evaluate your business on growth metrics and revenue potential, not physical collateral.

But bridge financing isn't one-size-fits-all. Each funding instrument you use to bridge a gap works differently and serves different goals. The question is which type aligns with your specific outcome. If you can't articulate a clear milestone or ROI, you're not bridging a gap but postponing a reckoning.

When done right, bridge financing transforms your negotiating position. Instead of raising capital from desperation, you raise it from strength. Instead of accepting unfavorable terms because you're out of runway, you dictate terms because your metrics prove your trajectory.

That difference can mean millions in preserved equity or the difference between getting funded and shutting down.

How Does Bridge Financing Work?

Bridge financing can come from either equity or debt instruments. Each structure works differently, carries different risks, and suits different situations:

• Venture capital can give you years of runway, but it dilutes your ownership immediately.
• Traditional bank loans require assets you probably don't have as a tech company or startup. 
• Working capital covers operational expenses but won't fund strategic initiatives.

Bridge Financing from Equity Instruments

Equity bridge financing typically takes the form of convertible notes or SAFE (Simple Agreement for Future Equity) agreements from existing investors. Here's how it works in practice.

Your current investors provide capital now, say between €200,000 to €1M, that automatically converts to equity in your next priced round. The conversion happens at a discount (usually 15% to 25%) or at a valuation cap that rewards the bridge investors for taking earlier risk.

A Concrete Example

You raise €500,000 on a convertible note with a 20% discount and €8M cap. Six months later, you close your Series A at a €10M valuation. The bridge investors convert at €8M (the cap), not €10M, meaning they get more equity for their earlier investment. If your Series A had been €6M instead, they'd convert at €4.8 million (the 20% discount), again getting better terms than the new investors.

The mechanics are straightforward:

1. Sign the agreement
2. Receive the funds within days
3. The note sits on your balance sheet until conversion

You typically don't pay interest. Instead, the discount or cap serves as the investor's return. There's no monthly repayment, no financial covenants, and minimal ongoing reporting requirements beyond what you already provide to existing investors. They know you. They trust you.

Equity bridge financing works best when you have strong investor relationships and clear line of sight to your next round. Your existing investors need conviction that they'll get their return through the conversion event. If there's doubt about whether you'll close the next round, they won't bridge.

The Downside Is Dilution

Even though you're not setting a valuation today, you are committing to give these investors preferential terms in your next round.

That 20% discount effectively costs you equity on top of whatever you raise in the Series A itself. For a €500,000 bridge that converts at a 20% discount into a €3M Series A, you're effectively diluting an additional 3-4% beyond the Series A dilution.

Bridge Financing from Debt Instruments

Debt bridge financing means you borrow money and repay it with interest. The capital can come from traditional banks, venture debt, or modern flexible credit line providers. The structure varies significantly depending on the source.

Traditional Bank Loans

Traditional bank loans for bridge financing are very rare for early-stage companies. Banks want collateral (equipment, real estate, inventory) and profitability which startups don't have. If you do qualify, expect personal guarantees from founders, high interest rates, and restrictive covenants that limit your operational flexibility.

Venture Debt

Venture debt is more common for growth-stage companies. You borrow €1M to €5M at 15% to 25% interest, typically with warrant coverage of 5% to 15% of the loan amount. This means the lender also gets equity upside through warrants that convert to shares. The term is usually 3 to 4 years with interest-only payments for the first 6 to 12 months.

Venture debt example

You raise €2M at 12% interest with 10% warrant coverage. You pay €20,000 monthly in interest for the first year, then €20,000 plus principal amortization for the remaining term. The lender also receives warrants worth €200,000 at your current valuation. Total cost over three years: roughly €720,000 in interest plus the warrant dilution.

Flexible Credit Lines

Flexible credit lines offer a third approach. Providers like re:cap evaluate your business on specific metrics like recurring revenue, growth rate, and financial performance rather than physical collateral. You receive access to a revolving credit line (typically €50,000 to €5M) based on your business metrics and funding plan.

The key difference: you only draw what you need, when you need it, and repay on flexible terms from 1 to 60 months.

The mechanics work differently than traditional loans. You connect your financial accounts for a risk assessment. You receive a funding offer tied to a specific plan aligned with your use case. Once approved, you draw capital.

The repayment terms are flexible. You can choose short-term repayment (1-12 months) for immediate needs, or long-term repayment with grace periods (up to 60 months) for strategic bridge investments. Usually, a flexible credit line operates with fixed repayment schedules that match your funding plan. If your situation changes (you close an equity round early or need additional capital to become profitable) the plan can be adjusted.

The cost depends on your company's rating, which re:cap calculates based on ARR size, runway, revenue growth, and other financial metrics. Total financing costs are transparent upfront in your funding plan, showing exactly what you'll pay over the term. This structure gives you predictability while preserving the flexibility to draw and repay based on your actual capital needs rather than arbitrary loan terms.

Choosing Between Equity and Debt Bridge Financing

The choice between equity and debt bridge financing comes down to three factors:

1. Relationship with existing investors
2. Path to repayment
3. Dilution tolerance

Equity

Use equity bridge financing when your existing investors have capital and conviction in your trajectory. The conversion discount costs you equity, but you avoid monthly payments and financial covenants. This works best when you're 6 to 12 months from a clear Series A or Series B milestone.

Debt

Use debt bridge financing when you want to preserve equity and have a clear plan for deployment. Venture debt makes sense for later-stage companies with substantial ARR and a clear path to exit.

Flexible credit lines work better for earlier companies (€250,000+ annual revenue) who want optionality without restrictive covenants. The key advantage: you only pay for what you use, and you can adjust the plan as your business evolves.

When Startups Use Bridge Financing

Bridge financing serves two primary purposes for tech companies: strengthening your position before raising equity, or avoiding equity entirely by bridging to profitability.

1. Bridge to Next Equity Round

You're six months from Series A, but your metrics aren't quite there yet. Your ARR is €2.5 million when investors expect €3 million. Your net revenue retention is 95% when they want 110%. You could raise now at a lower valuation, or you could use bridge financing to buy time.

This is exactly what Meisterwerk did. The Berlin-based startup secured €350,000 from re:cap to extend its runway before Series A. "We show good revenue growth, but financing options are limited in the current ecosystem," explains founder Bertram Wildenauer. Rather than accept a down round or excessive dilution, they used bridge financing to improve their financial KPIs and approach VCs from a position of strength.

The math is straightforward. If bridge financing costs you 12% annually and helps you increase your valuation by 40%, you come out ahead – even after accounting for interest payments. You avoid dilution at an artificially low valuation and negotiate from leverage instead of desperation.

SOUS, an Amsterdam-based F&B marketplace, used the same approach. They knew Q4 would generate 40% of their annual revenue. Raising equity before that spike would mean giving up shares at a pre-peak valuation. CEO Devon Scoulelis secured €340,000 in bridge funding to capture the full value of their seasonal revenue before approaching investors.

2. Bridge to Profitability

Some startups are closer to profitability than they are to achieving venture-scale growth. If you're at €4 million ARR growing 30% annually with improving unit economics, raising another equity round might not make sense. The dilution would be significant, and you might not need the capital.

Bridge financing lets you fund the final push to profitability without sacrificing equity. Shore, a Munich-based digital platform for service businesses, used this strategy. They secured bridge funding from re:cap alongside a smaller equity round, creating a mixed capital structure. This allowed them to invest in high-ROI growth activities while preserving equity for riskier product development.

The bridge-to-profitability approach only works if your path is clear. You need visibility into your cash burn, confidence in your revenue projections, and a realistic timeline to positive cash flow. Most importantly, you need discipline to stick to the plan: bridge financing doesn't give you the luxury of pivoting or experimenting with new business models.

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Risks in Bridge Financing

Bridge financing from traditional lenders carries substantial risks that founders often underestimate. The most visible cost is interest, but the hidden costs can be far more damaging to your business.

1. Personal Guarantees and Restrictive Covenants

Many traditional bridge lenders require personal guarantees from founders. This means your personal assets are at risk if the company can't repay. For a CEO with a mortgage and family, this is an existential decision.

Beyond personal guarantees, some traditional bridge financing comes with financial covenants. You might be restricted from raising additional debt, required to maintain minimum cash balances, or forced to hit specific revenue targets. Miss these covenants, and the lender can demand immediate repayment or impose penalty fees.

These restrictions limit your strategic flexibility at the worst possible time. If you need to pivot your go-to-market strategy or if your customer churn increases unexpectedly, the covenant breach creates an additional crisis on top of your operational challenges.

2. Conversion Terms and Control Issues

Some bridge funding automatically converts to equity if you don't repay by the maturity date. The conversion terms are typically unfavorable: the lender might convert at a 20% discount to your next funding round, or at a predetermined valuation cap that seems reasonable today but becomes punitive if your metrics improve.

Worse, some lenders negotiate for board seats or observer rights as part of the bridge financing terms. This means bringing someone into your governance structure who has different incentives than your equity investors. Debt investors want repayment certainty and downside protection. Equity investors want growth and upside potential. These conflicting interests create board-level friction when you're trying to make strategic decisions.

3. The Timing Trap

The most dangerous risk in bridge financing is that it doesn't solve your underlying problem but just delays the reckoning. If you use bridge financing to cover a structural cash flow problem rather than a temporary gap, you're setting yourself up for a crisis in the future when the loan comes due.

Some founders use bridge loans to mask poor unit economics or failing go-to-market strategies. The bridge financing buys time, but if you don't use that time to fundamentally improve the business, you end up in a worse position: now you need to raise equity with both weak metrics and debt on your balance sheet. VCs view debt negatively if it signals desperation rather than strategic capital allocation.

Evaluating Bridge Financing for Your Startup

Not every funding gap calls for bridge financing. Before you pursue this option, evaluate whether it solves your actual problem or just delays it.

Your Runway and Revenue Trajectory

1. Calculate your exact cash runway: monthly burn rate divided by available cash. If you have less than six months of runway, bridge financing might be too late. You need immediate capital, and the due diligence process for any financing takes time.
2. Evaluate your revenue trajectory. Pull up your MRR or ARR growth for the past six months. Is it accelerating, stable, or declining? If revenue is growing but you're still burning cash due to strategic investments, that's a good sign for bridge financing. If revenue is flat or declining while burn increases, bridge financing won't fix the problem.

Back to Meisterwerk. They had solid revenue growth but faced a difficult fundraising environment. They used bridge financing to extend their runway and improve their position before approaching Series A investors. Their revenue trajectory justified the additional time, and the financing gave them leverage in negotiations.

SOUS had clear seasonal revenue patterns, with Q4 generating 40% of annual revenue. They knew exactly when they'd see a valuation inflection point, making bridge financing a tactical decision with a defined exit. Their revenue trajectory made the timing obvious.

Your Path to Profitability or Next Round

Write down the specific milestones you need to hit to either reach profitability or close your next equity round. Be honest about the timeline. If you need to increase ARR from €2m to €3.5M in six months, break that down into monthly targets. Can you realistically achieve that? Do you have the sales pipeline to support it?

Shore knew they were close to profitability and had a clear path to get there. Bridge financing lets them invest in high-ROI growth activities without the dilution of a full equity round. They combined debt with a small equity component, optimizing their capital structure for their specific situation.

If your path to the next milestone requires multiple pivots, experimental products, or unproven channels, bridge financing is the wrong tool. You need patient capital that gives you room to figure things out. That means equity, not debt.

Alternatives to Traditional Bridge Loans

Modern financing options offer better terms than traditional bridge loans, especially for tech companies with predictable revenue. Revolving credit lines evaluate your business on metrics that matter:

• Recurring revenue
• Revenue growth rate
• Customer retention
• Runway 

Shore diversified its capital stack by combining venture capital with re:cap's  financing. They use venture capital for risky product development and re:cap for growth activities with predictable ROI. This optimization lets them deploy the right type of capital for each investment.

SOUS initially planned bridge financing to Q1 2025, but founder Devon Scoulelis now sees a longer-term partnership with re:cap: "We might explore a path to profitability without relying on big rounds of venture capital." The flexibility of re:cap’s financing lets them adjust their strategy based on business performance rather than loan maturity dates.

Bridge Financing: The Decision Framework

Use this framework to evaluate whether bridge financing makes sense:

Green lights (proceed with bridge financing):

• You're within 12 months of profitability or your next funding milestone
• Your revenue is growing predictably
• You have a specific plan for using the capital (not general operating expenses)
• You've already cut unnecessary burn and optimized operations
• Your existing investors support the decision

Yellow lights (proceed with caution):

• Your runway is 5-7 months
• Revenue growth has slowed in recent quarters
• You need the bridge to fund a significant pivot or strategic change
• You're in a highly competitive fundraising environment

Red lights (don't use bridge financing):

• You have no clear path to profitability or your next equity round
• Your unit economics are fundamentally broken
• You're using debt to cover operational losses rather than strategic investments
• Your team doesn't have the capacity to execute the growth plan

Bertram Wildenauer from Meisterwerk summarizes the bridge financing decision well: "The question for us was how to extend our cash runway with little effort to secure the next equity round in a more convenient environment." Bridge financing worked because they had solid fundamentals and needed timing, not a turnaround.

Summary: Bridge Financing

Bridge financing serves a specific purpose: covering funding needs to reach business goals like profitability or strengthen your position before raising equity. Used correctly, it helps you avoid dilution at unfavorable valuations and gives you time to improve key metrics. Used incorrectly, it delays the inevitable while adding debt to your balance sheet.

The key insights on bridge financing:

• Bridge loans work best when you have a clear path to profitability or significantly improved metrics within 6-18 months
• Modern alternatives offer better terms by evaluating your business on recurring revenue and growth potential rather than physical collateral
• Successful bridge financing requires specific milestones, realistic timelines, and disciplined execution. However, it's not a solution for fundamental business model problems

Q&A: Bridge Financing

What's the difference between bridge financing and venture debt?

Bridge financing is capital (9-18 months) designed to cover a specific funding gap until your next equity round or profitability. Venture debt is longer-term debt (2-4 years) that complements an equity raise, giving you additional runway without dilution. 

How much does bridge financing typically cost?

It depends on the lender and its securities. For bridge financing, modern debt providers can charge 12-15% annual interest plus 1-3% origination fees.

Can bridge financing hurt my chances of raising venture capital?

Bridge financing affects VC perception depending on why you need it. If you use it strategically to improve metrics and raise at a better valuation, VCs view it positively. If you used it to cover operational losses with no clear improvement plan, VCs see it as a red flag. The key is demonstrating that the bridge financing solved a timing problem, not a fundamental business problem.

What happens if I can't repay bridge financing on time?

Consequences depend on your loan terms. Traditional bridge loans might accelerate repayment, charge penalty fees, or convert to equity at unfavorable terms. Some lenders can demand personal assets if you provide guarantees. Modern providers are often more flexible. Repayment adjusts to your revenue performance, so slower months automatically reduce your payment obligations. Always understand the default provisions before signing any bridge financing agreement.

Should I use bridge financing if I'm close to profitability?

Yes, if the math works in your favor. Calculate your exact path to profitability: how many months and how much capital do you need? If bridge financing costs less than the equity dilution you'd face in a fundraise, and you're confident in your timeline, it's a smart choice. Companies like Shore used this strategy successfully, combining bridge financing with equity to optimize their capital stack and reach profitability without excessive dilution.