Startups often find themselves in moments where they’re on the verge of something big like a new round, a product launch, or a major contract, but they need a little more fuel to get there.
That’s where a bridge loan comes in.
But what exactly is a bridge loan? How is it different from a bridge round? And how do founders raise one without falling into a debt trap?
Let’s break it down.
What is a Bridge Loan?
A bridge loan is a short-term loan that provides immediate capital to help a business meet short-term obligations while it awaits a larger, future financial event like closing a funding round, completing an acquisition, or securing a large customer deal.
Unlike a bridge round, which typically involves equity or convertible notes, a bridge loan is debt. This means that it comes with repayment terms, and often interest.
Think of it as a temporary financial bridge to help your startup maintain momentum during periods of transition.
When Do Startups Use a Bridge Loan?
Bridge loans are typically used in situations where time-sensitive capital is needed:
- You’re closing a new funding round, but need capital now to cover operations or hiring.
- A large customer contract or enterprise deal is signed, but upfront work or inventory must be funded first.
- Your collections are delayed, even though revenue is confirmed.
- An acquisition is underway, and you need funds to continue operations until it’s complete.
How Is a Bridge Loan Structured?
Most bridge loans are structured with the following terms:
- Principal: Fixed amount (typically ₹50 lakhs–₹5 Cr for Indian startups)
- Tenure: Short duration (usually 3 to 12 months)
- Interest rate: Ranges from 8% to 15% annually (sometimes higher for unsecured loans)
- Repayment terms: Can be bullet repayment, monthly EMIs, or conversion to equity
- Collateral: Optional! Some bridge loans are unsecured, others are backed by assets
In startup contexts, they’re often structured as convertible debt with the loan converting into equity in the next priced round at a discount or capped valuation.
Bridge Loan vs. Bridge Round: What’s the Difference?
| Feature | Bridge Loan | Bridge Round |
|---|---|---|
| Type | Debt | Equity (convertible or priced) |
| Repayment | Required unless converted | No repayment |
| Interest | Typically 8–15% | Usually none |
| Conversion | May convert to equity | Usually structured to convert |
| Use Case | Immediate capital for fixed timeline | Extending runway before next fundraise |
A bridge loan is financial fuel with a payback. A bridge round is equity-based breathing room.
How to Raise a Bridge Loan: Step-by-Step for Startups
If you’re considering a bridge loan, here’s a practical guide to approaching it effectively, especially for Indian startups:
1. Start with Existing Investors
Your angels, VCs, or syndicates already know your business. They’re your best bet for a fast, founder-friendly loan or convertible note. If that’s not sufficient, explore:
- Friendly investors in your network
- Specialized platforms offering revenue-based bridge loans
2. Define Your Capital Need
Figure out how much you need and for how long. Tie it to a clear use case:
– runway extension,
– product launch,
– delivery on a signed contract, etc.
Create a use-of-funds breakdown and outline your path to repayment or conversion.
3. Choose the Right Structure
- Convertible Note or SAFE: Most startup-friendly. Converts to equity in the next round, often with a 10–25% discount or valuation cap.
- Short-Term Debt: Traditional loan format with interest and repayment timeline.
- Asset-Backed Loan: If your business owns property, some Indian banks offer loans secured against it.
4. Prepare Key Documentation
For investor-backed bridge loans:
- Updated pitch deck
- Financial projections
- Current cap table
- Status of next funding event
For bank loans:
- Income statements
- Proof of collateral
- Repayment plan and identity proof
5. Negotiate Fair Terms
Key terms to understand and negotiate:
- Interest rate
- Repayment period or conversion trigger
- Valuation cap / discount (if converting)
- Any restrictive covenants or personal guarantees
Where to Get a Bridge Loan in India
Banks (for collateral-backed loans):
- HDFC Bank, Bank of Baroda, and other public/private sector banks offer bridge loans for property and sometimes for business expansion if you have assets.
Startup-Focused Platforms:
- Recur Club, Capchase, Velocity, GetVantage, Arc
These specialise in revenue-based financing — offering upfront cash against future predictable revenue.
Angel & VC Investors:
- Most startup bridge funding still comes from existing investors, typically structured as convertible notes or SAFEs.
Sample Case for Explaination: Bridging to Series A
Startup: A B2B SaaS for health logistics
Scenario: Signed a major state-level logistics contract, but needed ₹1.5 Cr to deploy operations before Series A closed.
Solution: Raised a bridge loan from existing investors at 10% annual interest with a 20% conversion discount into Series A.
Outcome: Maintained momentum, delivered the project on time, and closed Series A successfully at a better valuation.
Key Points to Remember
- Bridge loans are short-term and should be used with a clear repayment or conversion strategy.
- Existing investors are your fastest and most founder-aligned funding option.
- Prepare strong documentation and be clear on how the loan helps unlock your next milestone.
- Avoid over-reliance. A bridge loan is a means to an end, not a financial crutch.
Final Thought
Bridge loans aren’t a red flag, they’re a financial strategy. If used wisely, they help startups manage uncertainty without losing momentum.
Just like a real bridge, the goal is to cross it and not camp on it.