First of all, lets get clear as to what we mean by equity financing.

Equity financing occurs when ownership in a company is sold in exchange for an agreed upon purchase price.

The purchase price becomes new capital in the business and is recorded as such on the balance sheet.

In the business financing world, there are basically three general forms of financing…debt financing, equity financing, and some combination of debt and equity.

Equity financing, in many situations, occurs when a business or company can not qualify for debt financing.

Part of the reason for not being able to qualify for debt financing may be a lack of equity on the corporate balance sheet. Once this has been corrected through an equity investment, the business entity may immediately be eligible for different types of debt financing programs.

When a business is in a startup and development mode and has not generated revenues nor is cash flow positive on a monthly basis, then an equity investor is typically required to provide the cash flow necessary to complete the development process and get to a cash flow positive position.

Higher rate forms of asset based lending that provide financing debt to equity ratios higher than conventional lenders, will say that they are renting equity to the business due to the high level of debt and risk that the business is covering.

All things being equal, most business owners will prefer to debt finance their business needs as it comes at a lower cost than and equity investment in most cases, and the business owner retains ownership and control of the company.

That being said, debt financing can be difficult to manage, especially when you are working with more than one lender where the risk of being offside with some lender covenant is going to be that much higher. Debt financing sources can also demand repayment at times for no reason or wrong doing on the part of the business, potentially leaving the business owner or manager scrambling to manage cash flow.

Because equity financing is connected to ownership, its typically not always straightforward how an owner will be able to sell their shares and exit the business. Most corporations have shareholder’s agreements that outline this process, but it can still take considerable amount of time to exit and there is no guarantee that the initial investment will be reclaimed.

Equity financing in many cases is considered to be a more patient form of capital as its placement is usually connected to the future earnings potential of a given business versus existing financial returns.

The higher risk associated with speculating on future returns also demands a higher risk which is going to be expected by most any equity investor.

More and more often, we are seeing business financing solutions with both debt and equity elements where the investor/borrower is only looking to be in place for a period of three to five years, exit the business, and make a high rate of return on the capital provided upon exit.

For most start up business situations, the entrepreneur is first utilizing their own equity to get the business going, leverage debt to grow the business, and then use third party equity financing to scale out the business in order for it to reach it market potential.

So depending on where you are at in your business cycle, there can be different debt and/or equity financing solutions that are going to be more relevant to you.

The key point here is that each situation is unique and as a result most business financing solutions are customized towards available sources of debt and equity that are available and relevant at the time of need.

Click Here To Speak With A Business Financing Specialist For All Your Equity Financing Requirements

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Here’s the link to the full article… http://www.bizjournals.com/washington/news/2011/03/23/leasing-activity-on-the-rise.html

As with any information derived from an association that potentially benefits from positive reports, I will take the findings with a grain of salt.

The report basically tells us that 1) more businesses are applying for equipment financing and 2) more lenders are approving deals than at this time last year.

On both fronts, this could indicate that things are turning around in the general economy and that lenders are starting to get back to issuing loans and leases.

The last two years have been very difficult to say the least for small businesses and equipment financing companies.

For small business, many of the equipment leasing and financing sources disappeared from the landscape due to some combination of portfolio default and funding supply constraints.

For the financing companies, there was not a ton of applications to sift from, and from the ones they did receive, the underwriters were being very picky about who they wanted to take on.

But through the first quarter of 2011, things appear to be moving in the right direction, at least according to this report.

If you’d like to get assistance with equipment leasing and financing requirements in including purchase and debt financing, contact the business financing specialist.

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In any business, there are basically three parts that need to be working in balance for the business to grow and prosper.

The three parts are Marketing/Sales, Operations/Administration, and Accounting/Finance.

For smaller businesses that are on the come, it can be hard at times to have all three areas firing on all cylinders.

The importance of this when it comes to securing debt financing can be significant as no matter how well you can present the business, its opportunities, and what you’ve been able to accomplish so far, a debt financing source or lender is going to want to be sure that everything is going to hold together as you move towards warp speed in your business plan.

Increasing size means more people, more transactions, more stuff to keep track of and manage. Without some amount of stability in each of the three areas, the brilliant up front presentation requesting  growth capital can be quickly dismissed if a lender discovers that one or more of the key business areas is under developed or lagging behind the others.

And in many cases, the weakest link in the chain is the area of Finance.

Here’s a typical example.

A business has successfully got off the ground, been operating for a couple of years, made some profits, and is well positioned in the market to start taking greater chunks of market share from competitors with inferior business models or offerings. The only thing the business owner believes they need is more capital.

But when interested debt lenders start pealing back the covers, they discover that the score keeping system is a total mess and information tracking for management purposes is mostly done on scratch pads outside of the accounting system.

This is not an uncommon occurrence that typically is trivialized by the owner as their main focus is market and sales (which it should be) with a secondary focus on operations, and limited to no focus on finance.

But from a lender’s point of view, not maintaining an up to date bookkeeping system is a big deal, especially if you’re planning to double or triple the size of the business in a relatively short period of time. And its not just about not having the historical bookkeeping completed. It’s about the business not knowing exactly where its at all the time and flying a little bit blind. This type of unbalanced approach can lead to customer bad debts, loss of supplier credit, government arrears, cash flow shortages, debt covenant failures, and so on.

In most cases, one or two weeks of intensive work utilizing some outside resources can fix the problems and get the finance function up to an acceptable level to support the other areas of the business. And this is not just to satisfy a banker. Getting the finance and accounting systems in place and up to date are essential if the business ever intends to reach its goals.

Failure to meet the lender expectations in this regard is going to make it hard to secure business financing, especially lower cost forms of capital.

Being able to demonstrate the financial aspects of your business on command is expected. The sooner a business owner comes to this conclusion, the faster the business is going to be able to grow and easier it will become to secure the capital required.

Click Here To Speak With Business Financing Specialist Brent Finlay

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One of the most frustrating aspects of trying to locate and secure business financing from private debt or equity sources is that the process hardly follows any type of formula. The people with the money entertain offers from people that want to utilize the money and sometimes deals are worked out.

Sorry, but that’s about as scientific as it gets.

The people that either own or control the gold make the rules, make them up on the fly, or change them whenever they want. If you don’t like their approach, don’t try to work with them. The problem, however, is that most sources of private financing are going to act in a similar fashion.

And as I have been told on more than one occasion when I got into a discussion as to how a financing deal could or should be structured…”Its my money and I’ll do whatever I like with it”.

Obviously if private funding sources were always completely unreasonable and unpredictable they would never lend or invest much of anything. So for the most part, there is a method to their madness. But that doesn’t stop weird and unpredictable things to happen from time to time.

As a business owner seeking capital, you need to be prepared for this type of experience and temper your ego and tolerance level at times to allow for funding opportunities to eventually unfold in your favor. The passive and patient approach isn’t always going to work, but its going to score more results than a frustrated and demanding demeanor will.

Since 2008, there are arguably less active sources of higher risk capital reviewing more potential requests for capital. So for venture capital, angel investing, and hard money lending they basically have their pick of deals and tend to take their time in order to make the best potential choices.

Another challenge with private funding sources is that these are typically not large organizations and usually are operated and controlled by a handful of people. So when they are in the middle of one or more deals, it can be hard to get their attention until some time in the future. They will also have finite resources so its also a case of having a deal they like at a time when they have money available to put out into the market.

And if a better deal comes along when they’re 90% along with your deal and they don’t have enough money for both, guess who’s going to lose out.

Acquiring private capital is both art and science, can require great patience and perseverance, and has a lot to do with timing.

Keep these points in mind before starting on your quest for capital.

Click Here To Speak With Business Financing Specialist Brent Finlay

Technorati Tags: angel investor, Business Financing, Debt Financing, Equity Financing, private equity, private funding, private loans, the person with the gold makes the rules, venture capital

What the right cost of funds should be for any given deal is always an interesting question to ponder. Business owners will get a certain interest rate or rate of return locked into their mind and won’t settle for anything less. If they have properly gauged the market, this can be a good strategy, provided you have time to beat the bushes for the best deal.

In reality, however, every business financing scenario where a debt lender or investor extend money to a business for some application is a customized solution. No two are the same and at any given point in time there can be radical departures among what is available in the market for otherwise seemingly similar deals.

Sometimes you get lucky and step into a rate that would not typically be available to your business and the desired application of funds. Sometimes you’re not so lucky and its hard to find anything where the cost of funds is what you would consider reasonable.

So what is the right answer in terms of when is the cost of capital too high?

Assuming you have properly approached the market with your financing requirements, the appropriate cost of funds, at a given point in time, is what you cash flow.

If you must have money right now for operations, expansion, survival, etc., then you need to determine if you can cash flow the best available deal in the market. If you can’t, don’t take the dough. And when I say cash flow, I don’t mean come up with a forecast based on some low probability assumptions. If you can’t debt service the financing proposal on a cash flow projection with at least a 70% probability of success, then the cost of money has gotten too high.

No one wants to pay more than they need to at any time. But business financing is very fickle and even more unpredictable, so some times the deal is better than others.

The main objective is to make decisions that will allow you to fight another day versus the alternative.

If you’re too focused on securing a low cost of financing, you could run out of time and blow a good deal. If you take on financing that can’t be cash flowed within reasonable certainty, you may very well have sold the farm.

The point here is don’t get hung up on interest rates or rates of return, get hung up on cash flow and time lines. The longer you stay in business, the more often the cost of money will be in your favor and allow you to bank good returns. Its just not always going be that way, so get used to it and make the best decision today to assure better future opportunities.

Click Here To Speak With Business Financing Specialist Brent Finlay

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When it comes to business financing, the whole process is an interesting study on promise, commitment, and follow through on both the side of the borrower and the lender.

When lenders are prepared to issue a commitment, they provide a piece of boiler plat, pounded out by their lawyers, that a borrower can’t possibly comply with in an absolute sense with more out clauses built in than most hollywood prenups. The lender words everything in their favor and basically provides you with a take it or leave it proposal on all the crafted wording. Even if they are open to make changes, do you have the 30 to 60 days to wait to deal with the back and forth process between their legal counsel, head office and your lawyer?

Probably not. So are lenders hypocrites, preaching loan defaults on one hand and then causing them to happen on the other? Sure they are.

But what about the other side of the equation?

Many business owners will say just about anything to get the capital they’re looking for, especially if their in a real pinch. The prospects of things not working out are not an option and if things do go sideways sometime in the future, the business owner will deal with the problem when required.

Yet, when things do go south, the first thing the borrower does is to try and think up every conceivable strategy to get out from paying back the debt or having to go bankrupt or needing to liquidate other assets to repay the lender that was promised to be repaid… in writing.

Basically, both sides both talk out of both sides of their mouth.

Which is one of the main reasons the current financial markets are in such a mess.

The lesson here if any is that the process of borrowing and lending is very much a game where the rules can be changed by both sides all the time. Its also not for the faint of heart. So if you want to be a borrower or a lender, make sure you’re up for the risk that goes with it.

Sure, as individuals we are conditioned to take on debt to drive the economy…homes, cars, credit cards. But business credit takes risk to a different level, requiring much more savy and fortitude to properly play the game.

The old expression, “neither a borrower or lender be” has been around for a long time for good reason.

But the reality of business is that leverage is required to make the economy go round. So if you’re in business, you’re in this game.

The challenge right now is that most business owners don’t realize that this is a game due to the fact that we have had an unprecedented good run over the last few decades and they haven’t previously had to deal with things not going so well for an extended period of time.

So regardless of your personal moral fiber and commitment to do the right thing, understand that from the impact of the current recession the financial world has now changed and the probability of you as a business owner or lender being on the wrong side of someone else’s agenda are much higher.

Business financing is definitely both art and science. Its also a mix of good intentions and bad, unfortunate circumstances and fateful occurrence.

In the words of Andrew Grove, “only the paranoid survive”. its not about whether or not you’re a hypocrite or not any more regardless if you’re a borrower or lender. Its about how well you play the game.

As far as morals and ethics go, you should always be prepared to play fair… as long as everyone else does.

Click Here To Speak To Business Financing Specialist Brent Finlay

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I have often written that business managers and owners tend to leave the process of acquiring capital to the last minute and end up scrambling in many cases to get some type of financing in place before more costs are incurred or an opportunity is lost or some other dark consequence of not getting things done on schedule.

Not only does this very common approach to business financing create less than desirable results in the short term, but it also can wreck havoc on future business opportunities.

Let me explain.

The process of financing a business and managing a balance sheet is a lot about thinking three steps ahead as you try to proactively predict how things will unfold in the coming years and capital the business will require to operate within your predicted or desired path. And future predictions are not always going to be about growth. Sometimes the look ahead is going to be more on the gray or even dark side as you realistically or conservatively see a storm coming ahead and make a plan to deal with it that will hopefully lead to your long term survival.

Regardless of how you see the future, there is cause and effect in the field of view that needs to be factored into how you cash flow and fund your business.

This is why the decision making process of today can be so critical to what predictably is going to come next. Business financing done in haste most times creates a financing structure that will not easily allow for future moves without creating cost. In some cases, the capital acquired today will be a death sentence to the business if the future unfolds in a direction that is in congruent with what has been accepted or arranged.

An example of this would be an obsession with the cheapest sources of money. These sources not only can take an excessively long time to get into place, but they also demand close to extreme security positions and very stringent operating requirements that may or may not be met by expected future events. While cheaper money is always preferred over the alternative, the business has to be able to meet the requirements of the money, or be faced with demand to repay at likely an inopportune moment in time. And even if the business owner can comply with the demands of the money source, is there any flexibility left to allow for what comes next which might just require more outside money?

The process of thinking three steps a head requires that the business owner starts early and never stops looking for and understanding the available sources of business financing that are relevant to what he or she is trying to accomplish. The more pressed someone is with respect to securing capital, the less likely any capital required will properly allow for future moves.

Click Here To Speak With Business Financing Specialist Brent Finlay

Technorati Tags: Business Finance, Business Financing, capital acquisition, Debt Financing, Equity Financing, financing a business, long term capital planning, securing capital, thinking three steps ahead, three steps ahead

Commercial debt financing has a lot to do with figuring out the term structure jigsaw puzzle that relates to your business or the capital requirements of what you require funding for.

Each category of asset will command a different type of risk profile and will attract different lending programs. On the surface, that seems clear enough to most, but the challenge comes in trying to get the right amount of leverage at the lowest cost of borrowing.

For instance, many lenders will have primary and secondary financing options. They will provide you with their primary offering on a certain class of assets and a secondary offering on other assets you hold. Or they can bundle their offering whereby you can get the business financing you’re after from them, provided that you transfer personal financing requirements and investments to them.

For more established businesses, the challenge is to take what you have to leverage both commercially and personally to secure the best potential deal at any give point in time.

This may involve one lender or a number of lenders, each focusing on a different classification of asset and term structure of debt. While the single lender model may be preferred, it doesn’t always provide the amount of leverage required. For greater leverage, the different categories of assets (working capital – accounts receivable and inventory, equipment, real estate) need to be financed through lenders that specialize in that particular asset class. This can also drive up the overall weighted average cost of borrowing, but this may be a necessary trade off to secure the amount of capital required in the short term. Obviously there will need to be sufficient sales and margins to cover the cost of financing and over time the goal would be to reduce the cost of funds and take on a better term debt structure overall.

The challenge to any business owner is that their situation will always be somewhat unique to anyone else and therefore a customized solution is required whereby the business owner figures out the best lender offering or combination of lender offerings that best fit his or her business at a given point in time.

And once a financing structure is decided on and put into place, there is still going to be an ongoing requirement to stay ahead of the curve and either find better financing options that improves leverage and cost requirements or provide for alternative financing scenarios in the event that one or more lending partner changes their interest in financing your business.

Click Here To Speak With Business Financing Specialist Brent Finlay

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When seeking capital funding for any business venture, there can be a lot of different trade offs to consider with the different sources of capital that may be interested in funding a particular deal.

The most common forms of business capital come from debt and equity financing sources. And even though equity equates to ownership, there is still an implied cost of capital that needs to be factored in before accepting this type of money.

The most common problem business owners have when seeking capital is trying to locate money at a cost that does not likely exist. The second biggest problem is not properly comparing different forms of business capital when deciding on how to fund the business.

With problem #1, the business owner or manager does not understand the market and continually rejects potential offers to finance at rates above their target rate. There is nothing wrong with this approach provided that the target rate actually exists for the deal or will appear before the business runs out of time.

In order to avoid being in this situation, a more realistic perspective needs to be established. Remember that the cost of money always has to do with risk and supply with risk and supply typically being inversely related (as risk goes up, supply goes down).

As an example, its not uncommon for a business owner to seek unsecured business capital from private lenders at 10% interest or lower because they can’t secure anything from a bank and they have no assets to leverage. The proper perspective is that private lenders can lend their funds (and do) all day long on real estate and be fully secured and still lend at 10%+ interest rates.  so why would they take on a higher risk (unsecured debt financing) for the same cost of capital?

With problem #2, the business fails to properly make an apples to apples comparison with different forms of business capital and defers instead to self created rules or assumptions.

For example, when a business requires business financing capital in a risk range that could be funded through debt or equity the costs and trade offs between the two forms need to be properly weighed.

Higher risk deals can command debt financing rates in the high teens. Most equity investments want a similar return or higher. Yet when a business owner sees an 18% interest rate as an example, many will immediately believe that’s too high and turn to an available equity solution that could actually be higher over time.

With debt, the best things about it is that you retain ownership and if you pay it back you retain control of the business. With equity, unless there is a buy out provision structured at the start, there may be no easy or cost effective way to pay out the investor as the business grows, creating a very expensive source of capital. Even with a structured buy out, the true cost of capital, if anyone spent the time to figure it out, could be substantially higher than the original debt financing solution.

If the cash flow is available to service the debt, the high interest rate loan option should not automatically be dismissed.

The search for capital often times tends to be left too long so business owners are forced into taking what they can get. But when choices are available, being realistic on your expectations, and crunching the numbers to better understand the true cost, can mean a tremendous saving in the long run.

Click Here To Speak With Business Financing Specialist Brent Finlay

Technorati Tags: business capital, Business Finance, Business Financing, capital, cost of business capital, cost of capital, debt finance, Debt Financing, equity finacning, true cost of capital

Business is and will always be about leverage. The ability to leverage both human and capital resources is the cornerstone to being able to grow and scale profitable business operations.

Yet the challenge with leverage is that its hard to stay on top of what balance sheet structure is best for your business at a given point in time. There is definitely a need to think ahead as what makes sense today may not work tomorrow.

For instance, if the business is going through a bit of a down turn and cash flow is or will be stretched, its far better to start working out how to leverage your available leverage early on even when its not completely clear as to how things will place out versus waiting until you have a problem.

Equity based financing under distress is not only going to be harder to come by, but its going to cost more as well. The worst part is that if you do hold good quality assets and the business does have a strong plan for improving financial performance, its easy to also overpay on equity financing due to the time constraints you could be under from leaving the process too long.

Even when everything is going well, the bank or institutional lender you’re working with today may not be interested in funding future growth which may come as a surprise when you least expect it.

The point here is that optimal financial leverage needs to be an endless pursuit on the part of the business owner and/or business manager. And leverage is always going to be based on the amount of debt financing you can secure against some combination of the paid in and market value of the equity in the business.

The second point is that regardless if your in a survival mode or a growth mode, its easy to pay too much for business financing due to a lack of time available to conduct the process.

And the third point is that today’s lender is not necessarily going to be tomorrows lender so you always have to be cultivating what will be the next best fit for the business as the business changes and the overall economy changes around it.

Click Here To Speak Directly To Business Financing Specialist Brent Finlay

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