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.