Posts Tagged ‘Equity Financing’
Equity Financing Application
November 14th, 2011
“When Should Equity Financing Be Considered As A Source Of
Business Capital”
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
Business FinancingDifferent Stages of Equity Financing
December 6th, 2010
“With Equity Financing, It’s important To Know Where To Look And What You’re Looking For”
For most business owners and entrepreneurs, this thing called equity financing is some what nebulous to say the least with all slices and sections of the market all thrown in together.
And while different forms of equity capital may be interested in very different types of business financing deals, there is some logic that can and should be applied to the pursuit of equity financing.
First of all, is your project is a pure development stage, pre commercial, or commercial with the need for expansion?
Each one of these stages of business development will tend to attract a different audience and command much different levels of interest.
For the pure capitalists, any type of deal may be something to consider if the investor believes they have the potential to get a strong enough return, but like most things in life, people in general, including equity investors, tend to have specific business stages they will consider for specific product or service categories servicing certain markets.
Second, the farther away you are from being able to sell something and make a profit, the harder its going to be to attract financing, and the financing you do attract is likely going to want the cake and eat it too along with the kitchen sink and all types of control.
The best way to attract equity is to 1) work from a position of strength and 2) be most focused on sources of money that already have a direct interest in what you’re trying to develop or bring to the market.
While I did say that equity investors can have very particular appetites, you can generalize somewhat and put them all into two groups. Group one is a pure venture capitalist that while only focusing on a narrow band of stuff, is still prepared to get involved in a project in the earlier stages. This group of investors are also prepared to look at a large number of opportunities before ever considering putting out any money.
Group Two represents people or companies with money or access to money who would be very interested in incorporating what you have developed or are developing into their business model to help fill a void, provide a missing piece, or turbo charge something they’re working on. The key to attracting this type of money is to have at least a working model or prototype of what you’re trying to do available to prove you’ve moved from theory to reality.
And if you have something Group Two wants, you’ve immediately increased your chances of securing equity financing as there may not be any other opportunities they are even considering funding that are related to what you have.
My advise on equity financing is, if at all possible, to focus on Group Two. Put together whatever money you can to get whatever you’re trying to do working at the smallest possible scale. At that point, you have something to sell and it shouldn’t be all that hard to find parties that would be interested, providing you’re trying to tap into an established market demand.
If you’re trying to blaze a new trail, that’s a whole other matter which will likely end up being more of a needle in the haystack approach of sourcing equity (sorry).
Click Here To Speak With Business Financing Specialist Brent Finlay
Business FinancingThe Person With The Gold Makes The Rules
November 10th, 2010
“When It Comes To Debt or Equity Financing, The Business Owner Seeking Money Has To Not Only Be Patient But Submissive At Times”
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
Business FinancingCost of Capital
November 2nd, 2010
“When Is The Cost of Money You Can Borrow, Rent, or Receive As Proceeds Become Too High?”
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
Business FinancingThinking Three Steps Ahead
October 26th, 2010
“Does The Debt or Equity Funding You Accept Today Help or Hurt You Manage The Business Tomorrow”
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
Business FinancingShort Term Equity Financing
October 15th, 2010
“Especially In Growth Situations, Short Term Equity Financing or Quasi Equity Financing Can Be a Preferred Financing Approach”
For the purposes of this discussion, short term equity financing is defined as capital that is acquired in exchange for a portion of ownership that will be paid back in 5 years or less with the original ownership being restored in the process.
This type of equity financing approach is best suited for growth companies with good margins that can afford to pay the higher cost of capital associated and can in turn secure the capital they need to effectively grow and scale their business.
Too often business owners are hung up trying to find high risk debt that will require debt servicing which can drain cash flow and cause implosion if things don’t go exactly as planned.
At the same time, its also understandable why business owners are apprehensive about selling off part of their business and potentially giving away too much of their future.
The business financing solution to high growth, high margin situations where there’s a good probability that the plan to grow will succeed, can be satisfied by equity investors or forms of convertible debt financing that share the same objectives as the business owner, only in reverse.
For the short term equity investor, the goal is to put funds into a company in exchange for ownership and have the company execute its plans and generate the expected return in the shortest time possible at which point the money invested is paid back with a healthy return and ownership sold back to the original owners.
Short term equity investors are looking for opportunities to flip their money in and out of a business and double it or better in three to five years. They are not interested in long term ownership and the risk and administrative complexity that can entail.
Some business owners may feel that paying an investor back double what they put in as an excessively expensive form of financing. But when confronted with this opposition, I will paint the picture of the business owner sitting on some sandy beach 10 years from now, after reaping the success of getting their business scaled up to its potential as quickly as possible, and revisiting this decision to use short term equity capital. Will they really be saying to themselves, dam I gave away too much in cost of capital 10 years ago to build my wealth? Not likely.
The long term benefits can far out weigh the costs, provided everyone goes into the equity financing arrangement with a well defined beginning and end to the relationship.
Click Here To Speak Directly With Business Financing Specialist Brent Finlay
Business FinancingEquity Financing Exit Strategy
September 27th, 2010
“Equity Financing Considerations Are Similar To Marriage With Some Added Twists”
When business owners are looking to raise capital through equity financing, they are planning to sell off a portion of the ownership of their business to someone else in exchange for a cash payment. This sale of ownership can be of a controlling or non controlling nature, but unlike debt financing where you pay back the money borrowed, ownership can have very long term connotations.
That’s one of the reasons why many people equate equity investing to marriage in that you’ve got to plan whether you want to be in the relationship for an extended period of time and under what conditions.
And while marriage agreements can be made going into the relationship in the form of prenuptial agreements, business financing scenarios involving equity capital should go one step further and have both an entry and exit agreement in place.
Especially for small businesses, it makes very little sense to take on an equity partner with no clear exit strategy for either partner. Many businesses get trapped in a situation where either a owner wants to leave the ownership group or the owners can’t get along anymore and someone needs to buy out the other.
Without an upfront agreement as to how an owner can exit, the process can be grueling to complete and financially damaging to both parties, but particular to the trusting and naive that get taken advantage of by the remaining owner or owners.
While any equity investment will clearly outline what you get for the cash you’re paying, it also should have its own form of prenuptial agreement and states exactly how things ARE going to end. There is no misconception here that everyone’s in it until death do us part, and even if that was the case, what happens to the ownership shares on passing? Failure to plan out the end right at the beginning is a bad idea in virtually any situation I’ve come across.
But in the hast to secure financing and the excitement of getting going or getting things back on track, the exit strategy is many times over looked or over simplified.
And the exit strategy you’re prepared to consider will also better align you with sources of financing that are better fits for what you’re looking for. For instance, there are many equity investors out there that want to double their money in three to five years and then get all their money back along with the required gain. This speaks to a very specific exit strategy that has to work for both sides at the outset of discussing the deal.
For investors that want to ride the wave of opportunity there should still be an exit plan to really protect both sides as the longer the relationship goes on the more likely something is going to happen with respect to ownership and ownership objectives.
The other part to keep in mind is that the more sophisticated the investor or investor group, the more the exit plan is going to be stacked in their favor, taking advantage of the entrepreneurs financial ignorance or sheer desperation.
So, yes equity financing is very much like marriage, but with a contract going in and one going out with the divorce or funnel preplanned.
Click Here To Speak With Business Financing Specialist Brent Finlay
Business FinancingLeveraging Available Equity
September 14th, 2010
“How To Best Access The Capital Tied Up In Your Assets”
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
Business FinancingEquity Financing Considerations
September 5th, 2010
“There Are Many Things To Consider When Looking Into Equity Financing Options”
When seeking equity financing for an existing or future business, its important to make sure you have a clear understanding of what you’re getting into.
Many times business owners are either in too much of a rush or pressed against a wall to consider the pros and cons of any equity financing options they are considering, being more inclined to take what they can get. Even if there is more time available to consider the “goodness of fit” of a potential investor into the business operation, the key issues and considerations can still be easily overlooked or glossed over.
The primary thing to remember is that taking on an investor is like marriage. You could be involved with this new person or person for a long time, and breaking up the relationship at a future point in time may not be very easy or even possible to accomplish under terms you can live with.
That being said, one of the first tenants when considering taking on an equity investor is start with the end in mind.
The reality is that anyone who gives you their money is going to want it back, so it only makes sense that the ending of any proposed investor marriage is clearly lined out from the outset in a manner that is acceptable for both parties.
From the business owners point of view, the goal may be to be able to buyout the investor at a specific point in time for a clear dollar amount, or at least for a dollar amount that is calculated by an acceptable formula.
This creates a structure where both sides can size up the value to each other of getting involved in a transaction in the first place as well as providing some level of protection to both parties.
Selling off part of your company without doing this is dangerous to say the least. Everything can seem nice and light at the start of the business relationship, but things can change radically in a very short period of time.
And regardless if the business is ahead or behind on its financial projections created at the time equity financing was secured, there is a defined process for either party to deal with any changes in circumstances or expectations.
Once the honeymoon is over, its hard to predict where the relationship will go so it only makes sense to provide both sides with a way out that doesn’t potentially kill the business in the process.
Click Here to Speak to Business Financing Specialist Brent Finlay
Business FinancingThe Business Financing Landscape Has Changed … Get Used To It.
March 21st, 2010
I’ve written a lot lately about many of the changes in the capital markets and many of the ways these changes have impacted the ability of small and medium sized businesses to locate and secure financing.
The hard part of these recession driven changes to the market is that there isn’t going to be a near term return to the market conditions we’ve basically gotten used to over the last two plus decades.
Let’s face it, the capital markets have not seen anything like this since the end of the second world war.
A large percentage of the capital markets were driven and built up over time by the long run health of the overall economy. Yes, there have been some significant bumps in the road over the last thirty or so years, but nothing as game changing as what we’re seeing right now.
Large parts of the market have disappeared all together as record numbers of bank and commercial financing company failures lead the headlines on an almost daily basis.
When the economy gets back to steady monthly growth, the crater in the market we now see isn’t going to fill up anytime soon.
This tells us that the go forward business financing market is going to take on a very different look for some time to come and it may take decades to get back to anything close to what has been in place in recent memory.
The biggest benefit to business owners with the old status quo was that there were numerous sources of capital all trying to carve out their own unique place in a market that seemed to be growing without end. Similar to the residential market, the commercial sub prime market exploded as companies raced to get their share of the market demand for more capital.
But when the economy slowed down, and highly leveraged companies started crashing all over the place, starting a domino effect like nothing we’ve ever seen and are still experiencing, collapsing the capital market structure that was created over several decades.
And while government bailouts have helped stabilize the money supply to some extent, its hard to know if the main beneficiaries are actually going to make structural changes to their practices or continue on overheating the economy once things get back on track, getting us all set up for another recession in the not too distant future.
Bottom line to all this is that things are going to be different from now on and may be significantly different for decades to come when it comes to locating and securing business capital that your going to be able to cash flow.
Business owners have been spoiled by the funding choices available to them, causing them to practice what I would call less that optimal business finance practices. In fact, in many cases, there is no business finance strategy at all.
The reality is that when you borrow money or take on an investor, the money belongs to someone else and they are going to want it back. The building up of debt over time without a plan to pay it down is good in theory from a weighted cost of capital point of view, but in reality sudden changes in the fortunes of your lender or investor can turn your business upside down in a hurry with no solution in sight.
Business owners need to get back to contingency planning, having some amount of capital buffer to weather financial market storms, and managing their balance sheets so that debt levels are kept in check.
The days of fast and loose money are gone for now and I’m not sure if and when they’ll be back.
Click Here To Speak To Brent Finlay For Your Business Financing Needs.
Business Financing