Rabu, 05 Maret 2014

5 Ways to Raise Capital

Like the great Paul Simon song, “50 ways to leave your lover”, there are probably at least 50 ways to raise capital. As a writer, not a crooner, I will endeavor to describe 5 ways to raise capital.
1. Asset based financing - bank loans and receivable loans fall under this heading. There is an abundance of prime and sub prime lenders in this market broken down by loan size. As banks retrenched after the financial crisis of 2008, many asset based lenders came into play. It is not hard to find these lenders online. Asset based lenders are reliable because there is usually one for every possible scenario. There are banks for larger companies with pristine balance sheets. There are collateral based lenders for companies who are no longer bankable and going through a turnaround. Factors are usually very expensive. The more risk the lender assumes, the less they usually look at the health of the company’s balance sheet and more they look at the quality of the collateral. You need clean financial statements and a description of your business to be able to start the conversation with these lenders. Of the 5 ways to raise capital, this is a straightforward option.
2. Mezzanine financing - there is a plethora of mezzanine lenders in the market seeking to lend directly to companies. Their capital is relatively expensive when compared to bank loan rates, but inexpensive compared to the return requirements of an investor. The criteria is not asset based, but cash flow based. They are focused on ensuring the company is generating enough cash flow to pay back their principal. Companies that can use the money to generate high returns are the best candidates for mezzanine financing. Most companies that get mezzanine financing have the ability to double the size of their company through buying another company or accelerating their own growth. This large growth drives down the cost of the money. To engage with mezzanine lenders, you should have a mezzanine financing advisor on your side.
3. Growth Equity Raise - growth equity is designed to help you accelerate your growth. It is money that ends up owning a small percentage of your company. With growth equity, you are getting an investor who will be involved in the board level decision making. Growth equity investors usually bring connections and expertise to the company in addition to their money. Of the 5 ways to raise capital, this takes a lot of work and requires outside assistance from a corporate finance advisor.
4. Crowdfunding - This option is the newest of the 5 ways to raise capital. Like all things internet, this option holds great promise but also many pitfalls. With crowdfunding, if you have a hot and sexy concept, you may be successful. The amount of capital success is usually directly related to the amount of blue sky in your pitch. Most companies that have operating histories or that are non tech and mundane are not going to get much traction through crowd funding. It’s a very impersonal way to raise capital and it’s hard to really know who you are getting in bed with from an investor standpoint.
5. SBA loans - the Small Business Administration has changed its programs with respect to loan size and other qualifying criteria. Historically, you had to be a certain size to qualify for a loan. Banks appear more eager than ever to promote SBA loans to smaller, companies. This makes this option an up and comer of the 5 ways to raise capital. Many banks are originating these loans for syndication on the open market. There are many local SBA origination firms on line that you can tap for advice. Many of them even will help you through the qualifying criteria. There are loan bundlers to stay away from in this like every market. You should do your homework and have some conversations with reputable firms in this area. If you qualify, the SBA loan will be a low rate.

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