Like the great Paul Simon song, “50 ways to leave your loverâ€, 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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