Different Stages of Equity Financing

“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

Local Business Financing Dynamics

“Be Aware Of How The Business Financing Market Services Your Geographic Location(s)”

There can be some considerable differences how lenders operate in one local market compared to another. Local markets can be driven by one specific industry or be more diverse in nature. They can neighbor larger centers that are again narrowly focused on a core group of industries or more broadly representative of the market at large.

All these types of factors will have an influence on both debt lenders and equity investors.

Competition in the business financing realm is typically driven by lots of good business that can be done in a small area of concentration. The more competition, the more opportunity to not only secure financing, but to negotiate better rates and terms. Where competition is limited or sparse, it can be very difficult to not only locate any type of business financing at times, but the cost is likely going to be higher and needs to be factored into the equation.

And just because you see a nationally or provincially or state operated lending organization with branches and reps all over the place, don’t think for a minute that they are going to be applying some sort of generic criteria set or general appetite in all the different local markets they serve. Larger lenders that cover broader geography will typically divide their business according to local business market dynamics and have different rules for lending, different portfolio requirements in different areas.

Same bank, but very different rules.

As a business owner where location will be important to a business financing request, it is important that you become aware of what the business financing dynamics are in your market area. The same can be said for a business starting up or one looking to expand into another locale. Knowing the financing, lending, and investing dynamics for the industry and region ahead of time can save you a lot of pain and anguish in the long run.

And remember that whatever you believe you understand of these local dynamics today, the sands of business finance are always shifting so its going to be important to pay attention to any changes that occur in the local money supply so you’re not caught scrambling to either replace the credit facilities you already have or acquire additional capital for incremental business growth.

Sometimes there are under serviced areas of a region or country for more reasons than just supply and demand. If there isn’t a scalable source of capital around, it can hamper the development of any otherwise viable business opportunity.

Click Here To Speak Directly With Business Financing Specialist Brent Finlay

Reducing Lender Risk Increases Business Lending

“What Can You Do To Reduce Risk In Your Business Financing Application To Get A Lender To Say Yes”

In order to acquire any amount of business financing, the lender, investor, or funding source needs to be able to be comfortable with the risk of loss versus opportunity for profitable return. Clearly the latter must out weigh the former, or no business loan or other form of capital is coming your way any time soon.

Especially these days as we continue to crawl out of the recession, lenders are much less likely to take on any level of risk than they were two or three years ago. Which has created a considerable problem with business owners in that they don’t generally know that the bar has been raised on lending applications and if they want to secure financing of any sort, they are going to have to not only show a debt lender or investor that the risk of loss is low, they are going to have to proactively put things into place to protect the source of capital from losing money.

In taking from some marketing vernacular I heard the other day, its all about “stacking the cool”. This refers to marketers giving you so many features and benefits, many times above and beyond the core product, that you become strongly motivated to make a buying decision in their favor.

Same goes with business financing folks.

If you’re looking to secure money, you’re wearing your marketing hat as much as your finance hat. And its not just about accurately telling a good story about why someone should give you money. Its also about how you are going to make sure they get paid back with their expected return, or how are you going to stack the cool?

Obviously my analogy is somewhat of a stretch for the stuffy world of finance, but bear with me.

I was recently working on a rather tough deal that provided enough lender risk that we weren’t getting any where with relevant financing sources. So we started to stack up ways to reduce the lender risk…Corporate guarantees, personal guarantees, higher down payment, vendor repurchasing agreement for a portion of the asset value, etc.

Of course all these things are trade offs and can provide greater risk to the borrower. But if you need the money and no one is prepared to give it to you at any price, then its time to start taking on more of the risk or finding other ways to generate the capital your business needs.

After weeks of coming up with different risk reduction strategies, a financing commitment was provided that otherwise was never going to happen in the current market in the time the borrower had to work with. In better times, the process may not have been so hard and the borrower may not have had to take on as much risk as they ended up taking. But then again it may have been very similar, even in better times.

Point is that you need to be prepared to off load lender risk by taking on more yourself or finding someone else to participate. As I mentioned above, sellers may be interested in helping reduce risk to sell their products. Insurance companies may have programs that can reduce certain types of risks the lender is uncomfortable with. The more you strengthen the deal, the better your odds of getting funded.

Now that would be cool.

Click Here To Speak With Business Financing Specialist Brent Finlay

Guide To Debt Consolidation

“Here Are Some Things To Consider Before Going Through a Debt Consolidation Exercise”

While there can be many reasons to undertake a debt consolidation in your business, the single biggest reason, most of the time, is to improve cash flow.

And while cash flow can be constrained due to rapid and profitable growth, the majority of the time it is constrained by some down turn in the business or failure of the business to develop to a level of sustained profitability.

For these types of situations, here are some basic guidelines to consider before entering into a business financing debt consolidation action.

First, start the process as soon as you have consecutive months of cash flow deficits. Nothing about business financing is fast these days, so the more time you have to work through the problem, the more likely you’re going to end up with a workable outcome. And just because you started the process doesn’t mean that you’ll end up completing a consolidation action as things may change in your business for the positive before the process is completed.

Second, cash flow out your business for at least the next 6 months. If the ship is taking on water so to speak, at what point in time is monthly cash flow going to be positive again and how much money is going to be required to get you from here to there? For cash flow shortfalls, debt consolidation typically means refinancing existing debts that have fallen behind or are building up plus adding additional cash to the business to service the new loan until things turn around. There is no point getting a consolidation loan only to immediately fall into arrears with a new lender.

Third, factor in a higher cost of capital than what you’re already paying or not paying. Part of the cash flow exercise is to make sure that the go forward cash flow, post debt consolidation, is going to be positive. If the new cost of capital is significantly higher than what you were budgeting, your whole cash flow plan may go out the window.

There are two ways to do debt consolidation to improve cash flow. The first is to find a refinancing solution that will buy you more time and hope things work out before you run into cash flow problems again. The second way is to figure out a plan to get things corrected in the business and acquire incremental funds through refinancing to make the plan work plus some margin for error. In most cases, debt consolidation is a form of bridge financing that will allow you to get through a certain period of time of financial down turn. When things get better, you may choose to refinance again to accelerate debt pay down and/or acquire a cheaper source of financing.

While no plan is fool proof, having a plan is going to give you a better chance to improve the fortunes of the business and provide greater credibility in the eyes of lenders that are prepared to provide a debt consolidation loan in the first place.

The keys are to start early and be realistic of what the near future is going to look like. Being overly optimistic with respect to near term improvements in cash flow can lead to further problems.

Click Here To Speak With Business Financing Specialist Brent Finlay

The Person With The Gold Makes The Rules

“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

How Hard Is Hard Money

“When Hard Money Lending Is Your Best Business Financing Option, How Hard Is It Work With And Live With?”

Hard money loans are part of the world of asset based lending, and in simplest terms, they are asset based loans.

And while there may be several different potential definitions or variations to the term “Hard Money”, for the purposes of this post I’m referring to it as an asset based loan whereby the lender is primarily making a lending decision based on the value of the security being offered and the lender’s confidence in his or her ability to liquidate the assets if the loan goes bad.

True hard money doesn’t really care if the loan goes bad or not as the lender is completely comfortable going through the legal process to gain control and ownership of the assets and liquidate same to get their money back.

In many ways, this is the purest form of lending where a promise made is a promise kept. Many people compare hard money lenders to loan sharks, but there is a considerable difference between the two starting with the fact that no legitimate lender is going to break anyone’s legs or off their friends for lack of payment. And the interest rate, security registrations, and lending practices still must conform to the laws of the land.

The only real similarity to the two is that they are both linear, black hearted approaches to lending whereby recovery actions are swift and not subject to emotional biases or personal considerations. Or at least that’s typically the approach if someone is going to survive as a hard money lender.

From the lender’s point of view, the deal is all about the available security being offered and the all in position of the borrower. The more committed the borrowers are to their business or need for money, the harder they will also work at paying the loan back and retaining what they have.

Hard money also only comes into play when all other options for business financing have been exhausted in most cases, so its not like anyone has a gun pointed to the borrower’s head. They are entering into the lending agreement willingly and many times gratefully as the hard money business loan provider is likely the lender of last resort.

Most hard money lenders work through broker networks to make the market aware of their available money. So typically they are not hard to find. In terms of the cost and terms of financing, each deal is likely going to be customized to the situation with many hard money lenders charging what the circumstances will bear. In general terms, the cost of financing is going to be equivalent to a return on equity because that’s essentially the type of risk the lender is taking. And to manage risk, the lender will consider every form of registration available and look to secure any and all assets owned by the borrower, even if in some cases they are in third or fourth security position.

Like any source of capital, the decision to accept a hard money loan or not should be based on the foreseeable cash flow of the business. If the business can’t see a path to repay the loan, then it shouldn’t take it. This is somewhat the reverse of conventional financing where the lender decides if the cash flow is sufficient to support repayment. But with hard money, the repayment decision is more in the hands of the borrower.

Hard money, as I have described it, is a loan of last resort and should be pursued and managed as such. The consequences of not meeting the repayment requirements is foreclosure and asset liquidation. While one could argue that this always is the case, most conventional lenders are much less precise and surgical as a hard money lender when it comes to getting their money back. Creative borrowers will work all kinds of angles to block foreclosure and postpone or get out of repayment. Good luck trying to do that with a hard money lender.

Like anything else in life, its buyer beware. But it does have a role, and used properly, can save a business or at least give the owner one more fighting chance to make a go of things.

Click Here To Speak Directly To Business Financing Specialist Brent Finlay

Cost of Capital

“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

The Hypocrasy Of Lenders And Borrowers

“Who Exactly Will Honor Their Commitments In The Debt Financing Process?”

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

Thinking Three Steps Ahead

“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

Uncoventional Business Financing

“Sometimes, The Best Source Of Financing Available To You Is Not On Your Radar Screen”

The standard option most business owners and managers have is that any amount of business financing they are going to require over time is going to come from their bank or some other banking institution.

After all, banks and institutional lenders will regularly tell you that they want your business and can take care of all your business needs.

But the stark reality is that the Major banks and secondary lending institutions, especially the ones that are the most visible in the market place, are only looking for “A” deals and are frankly more interested in your investment portfolio, insurance policies, and any other financial service they can offer that tend to be far more lucrative and much less risky than almost any type of business loan.

And truth be told, the majority of small and medium sized business (SME) financing does not come from banks. Depending on whose numbers you choose to believe, the actual annual lending extended to SME’s is about 1/3 of what’s actually required by the market place.

But because the economy continues to go around and around, the money has to be coming from somewhere. And many times, these sources can be very unconventional compared to the formalized lending practices of a bank.

The key to any lending or debt financing arrangement is that the borrower has something of value to the lender than creates a basis for a loan to be made.

When the circumstances of a given business do not fit into the lending criteria of the primary or even secondary market sources, its time to look to more unconventional options.

Once again, the key is to understand the value you have to leverage and who would be interested in providing capital against specific assets you control. This can be anything. Patents, specialized equipment, strategically located property, etc. The possibilities are limitless. But unless what you have has a value to someone else, there is no business financing equation to work from.

As an example trade credit is a major form of capital provided by manufacturers and suppliers to move inventory through their systems. And while most trade credit is based on the financial strength of the customer, there are many variations to trade financing that come into play based on the value or opportunity available to the company providing it.

In most of these and other unconventional business financing scenarios, there is a steep walk away price to the borrower for not repaying the debt as written. The incentive of the lender is the opportunity to acquire something they consider as valuable at a discount or even at market price if its something that is exclusive or hard to come by.

Asset based lending is pretty much grounded on the premise that in the event of loan default, the borrower will either retain the security or knows how to liquidate it to get his or her money back.

But in reality, there are many, many unconventional loans provided every day from some of the most unlikely of sources.

So when you’re pushing rope up hill and have been turned down for the umpteenth time from the usual suspects, its time to think outside of the box and develop a business financing strategy that someone will be interested instead of continuing to push one that everyone clearly isn’t.

Click Here To Speak Directly To Business Financing Specialist Brent Finlay