Short Term Equity Financing

“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

Equity Financing Considerations

“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