In an economic environment where some venture capital-backed companies in the high tech sector are finding that securing further equity financing can be a time consuming and precarious business, many companies are turning to their existing backers for interim (or ‘bridge’) financing to allow them to continue in business while trying to secure more permanent funding.
It is common that this interim financing is advanced by way of a loan rather than a new issue of shares, perhaps because the backers have an interest in not seeking to put a valuation on the company and so pre-empting discussions with possible new investors. However, in addition to the common issues that face the directors of a company at the time of securing new finance (for example, would the investors require warranties?), taking a loan when the company is running short of cash raises some additional issues for them. In particular, while considering in general terms whether the commercial terms of the proposed loan are in the best interests of the company, the directors need to consider how the company is going to repay the loan when it falls due and, crucially, the impact that this will have on its ability to pay its other creditors as they fall due.
