May 19, 2020
5 Solutions to Securing Financing and Raising Capital
Yes, it is true in today’s global economy that common bank-backed credit is as reliable as a successful Tom Green television show. Don’t hit the panic button, though. The credit market ebbs and flows like Mike Myers’ popularity.
However, until the cash starts flowing again, your company may be forced to seek alternative sources of financing. Getting creative in today’s economic climate is the best way to raise capital.
Often times, securing capital absent the thorough evaluation process and agonizing bureaucratic hurdles lends the responsiveness and flexibility enterprise needs to stay competitive.
Whether your company needs a one-time cash infusion or a new line of credit, alternatives to the TD Bank Norths and the Bank of Montreals of the world exist. You may know of the periphery lenders; but do you know the benefits and risks associated with doing business with them? Here’s the good, the bad and the ugly:
Venture Capital Firms
The Good: New companies with little to no operating history lack the ability to raise capital publically or through loans. Thus, venture capitalist firms present these high-growth potential companies an option—sometimes the only option—to transform a drawing board concept to a boardroom cash cow.
The Bad: The risk/reward dynamic for venture capital firms can’t be ignored. In exchange for assuming such grave financial risk, venture capital firms require and wield not only undeniable influence but also a own a significant stake.
The Ugly: The nature between venture capital firms and CEOs is precarious to say the least. CEOs simply want to advance the business. Venture capitalists want a fast, lucrative return. Both sides think they can do it better, and often the CEO is replaced—justly or not.
The Good: Just as one would infer, and angel investor is usually an individual investor who ponies up their own capital to back a company. Angel investors typically are more connected to the process as a direct relationship exists. Statistically, angle investor-backed companies fair better than their venture capital counterparts.
The Bad: Like venture capital firms, the angel investor is exposed to tremendous risk and, to a certain extent, anticipates failure. As such, angel investors see a five-year window before exit strategy deployment.
The Ugly: Many angel investors aren’t in it for the money. The motivations and objectives must align between investors and CEO; if not, conflict will derail the project.
The Good: Asset-based lending is the most widely available and most utilised method of capital procurement. Nearly every commercial lender is in the asset-based lending business. Asset-based loans are backed by collateral.
The Bad: A commercial lender typically charges exorbitant interest rates because, well, because they can. And should a company default of an asset-based loan, the asset offered up is forfeited. Lenders know the value in asset-based lending and, as such, are relying on this financial arm to generate huge windfalls.
The Ugly: Asset-based lending has become synonymous with subprime lending. Typically, companies facing financial hardship have been rejected by banks and are turning to commercial lenders as a last resort. Commercial lenders are loaning to business that otherwise wouldn’t qualify for a business loan.
Initial Public Offering
The Good: An IPO is a most effective way for a company to reach the deepest pool of investors to raise massive amounts of capital instantaneously. The raised capital isn’t subject to interest. The financing goes directly into company coffers.
The Bad: IPOs are subject to complex legal requirements that vary jurisdictionally. For a company to go ‘public,’ they must work with multiple parties—underwriters, lawyers and government bodies.
The Ugly: While an IPO is often a celebratory time in a company’s lifecycle, the demands compile, like in the millions. A public company has millions of owners and all have a vested interested, which means serious consequences in the event the share price tanks.
The Good: While similar to common debt financing, mezzanine financing combines debt and equity into an attractive package to both borrower and lender. The borrower can obtain financing and retain full ownership if the loan is paid in full by a set date.
The Bad: The flip side is that if a loan is not paid in full on time, the lender obtains the rights to convert the outstanding debt to equity.
The Ugly: Mezzanine financing appears as equity on a balance sheet is generally used to obtain supplemental capital from commercial lenders or banks. If a borrower defaults on a mezzanine loan, odds are not in favor of a company’s ability to repay other debt.