The issue of money in a new entrepreneurial project is always a tricky topic, some believe that just by having a great idea it should be raining tickets, while the harsh reality shows again and again that the ideas are free and what really matters is the way to execute them. Subsisting during the first months of a startup is an exercise in true juggling, so knowing in depth the different options we have to finance our project is essential.
Of course, before embarking on the search for funding we should have a solid business model and know the steps to transform our idea into a business . In addition we must take into account if we have a viable business or one that is scalable to know the type of financing we will be able to aspire to. And, if it is neither one nor the other we can continue working the model until we find something with potential.
Once you have a solid project under your arm we can start to consider how much funding we will need at each stage and above all, we should have the availability of working capital in case we need it. It is not about having money just to have it since it is always better to have it when growing a business than not while the business ascends to stabilization.
There are 3 different avenues to consider when shopping for business funding:
Forms of direct financing
The first way to obtain financing is to scratch our pockets. Evidently if we ourselves do not believe in our project as to invest our money in it ... then turn off the light and let's go home. Nor should we become despondent, go crazy and settle at no capital for growth since our adventure is going to be complicated and we will need money during a good season.
The second way is known as the 3F (friends, fools and family), that is, get several unsuspecting, friends and family mainly, to leave us your money to invest in our company. Although it seems an easy and painless way to get money, things can get complicated especially if we are dedicated to getting the money making promises that we do not know if we can meet. The idea is to have people who have full confidence in us and not going to need the money in the short / medium term, and if they give it to us understanding the risk, then perfect.
If we want to professionalize we can choose to give shares of our company for this money, as long as we do not dilute ourselves in excess before we start by losing more than 50% of the company for example. The first 2 modalities would be where we are in the preliminary stage of the company, beyond there we will need a business model that has already begun to show good results and a business plan that helps to understand the projection and needs of the project over the long term. To be successful with this minimum funding it is essential to master the bootstrapping and apply leaned methodologies to take advantage of the last Dollar and not waste a penny.
The third is found in professional Capital Syndication Funding available through All Commercial Finance. A tried and proven method of project funding responsible for providing real estate development capital and oil field exploration and develop funds in the 1960s and 1970s. Then called “Limited partnerships or Structured Finance”.Funds were solicited usually from local accredited investors but investors from all over the US contributed to many of the same project capitalization.
Nothing new to Banks either! Banks have been using the procedure to fund loans they like but don't care to be the only contributor of funds to finance the requested loan. Two or more cooperating banks will jointly contribute funds to finance the loan note requirements. The advantage to this is monumental.
First, the sponsor would not have gotten the loan if it were not for syndication. And second, the lead bank only has half the risk in the event of a foreclosure. The exception, with Banks, personal recourse, good credit and big down payments are required and are not interested in business startup unless a franchised project with SBA loan guarantees.
Generally, such capital is considered risk capital without personal recourse to the sponsor of the project. Most successfully capital raises were greed motivated. Investors vying for better than average return understand that with great reward is usually accompanied by great risk. Investments with no risk such as a bank certificate of deposit, has virtually no risk and no return. But, with a investment portfolio of CDs you can sleep soundly at night. However, your investment just get chewed up by the rising cost of living index. Capital Syndications are more often than not, structured around the needs of the project to even include funding 100% of the project cost in equity and/or debt formats.
Your Business plan become the road map for the structure of your investment opportunity offering and what investors expect from you and your business.
Your Business plan, it is the financial foundation upon which you will build and operate your business enterprise. If your financial plan format is a ship wreck you could hardly expect favorable results from you business.
So, it must be done right by professionals. And, while price is always considered, it must include all facets of setting up the possibility of a successful fundable Syndication.
Reasons to use Capital syndications:
The object of Preferred Shares funding is not to provide long term low interest rate financing. Banks already do that. But, you must have the time in business, supporting of debt service history (generally require a minimum of 2 years), excellent business and personal credit references, reasonably high balance sheet liquidity, an inspiring Performa and a project they like. Keep in mind, Banks make loans based on historic revenue performance of your business. Not future projections. Unlike Preferred Shares funding which is funded based on expected future revenue performance. On the refinance of a startup business with a two year successful operating track record, the bank requirements would closely mirror our requirement also to refinance a two year old startup project?
Banks interest rates and fees is a reflection of their low risk taking policy. They could hardly calculate the coming months loan payments, which is a hard reality, based on a theory of revenue income. The hard fact is, theories often does not materialize. Banks could not survive supported by theoretical income.
The main objective of this program is to capitalize on current and or future profitable but under serviced business markets, excellent management skill set, and growth potential and create economic opportunities in the essential needs of the public and private industries by leveraging the small business man to compete in sectors generally dominated by big business. Such as transportation (aircraft finance, land and sea), agriculture finance, consumer and commercial technology finance, pharmaceuticals, medical, infrastructures, aided care and housing for the elderly, manufacturing etc.
The program provides capital (including working capital, interim reserves, complementary furniture, fixtures and equipment finance to build a business from the ground up to breakeven and stabilization making it possible to build the business model banks are looking to finance. This is not a bank loan or equity partnership. It is a capital Markets funded vehicle that provide the opportunity of investment in the Preferred shares of corporate entities holding ownership of the project (usually an off shore SPV for foreign customers) owned by the applicants onshore corporation or its principals. This enables the availability of 100% of the common shares to be retained by existing principal(s).
A successful loan transaction would entail
Some of the advantages
Fifth: Mezzanine Capital is typically not used for startup equity funding. An existing revenue based finance product. It is generally used by corporations and financial sponsors to finance:
Typically, subordinated debt providers will lend up to a multiple of 3 times EBITDA or even higher, and finance terms range from 3 to 10 years. As does Preferred Share financing. There is no limit on the amount of preferred stock that can be used.
Mezzanine is a commercial second mortgage in effect and is a valuable tool for management seeking to raise capital in the mid and later phases of a company’s development and is not suited for start-up projects. Mezzanine financing is usually either subordinated debt or preferred equity and is a hybrid form of capitalization with features of both debt and equity. Its equity feature is that investors does not own common shares of stock in the company. And, its debt feature allows the return on investment (ROI) to be fixed and structured like an obligation of debt.
In the theater of structured finance, “Mezzanine” is a form of capital which has a claim on a company’s assets and cash flow which is senior only to the common shareholders. That is, it lies between the upper and lower level. But, holds a more secure and respected position than regular equity or venture capital. It is often utilized in conjunction with senior debt. It reduces the amount of common equity required in a business and can boost the return on investment.
Filling the gap between the senior secured debt and common equity, Mezzanine has the potential to provide higher equity returns to the sponsors through the leverage of high returns from small amounts of capital subordinate to usually much larger amount of senior debt. It is also advantageous because the typical desired return by a mezzanine lender is 13% – 23%, according to a recent survey. This which is lower than the 24% – 30% on common equity required by private equity groups, reducing the overall cost of capital for a mature company. Mezzanine Capital is provided by lenders who specialize in its distinctive characteristics.
Subordinated debt usually includes a number of special features. These include “equity participation” via warrants, success fees, or options. Together they are often referred to as “debt with equity kickers”. Equity kickers (an addition to a fixed-income security that permits the investor to participate in increases in the value of equity ownership) are important as they align the interests of the subordinate debt lender with those of the business owner. Subordinated debt also has special provisions such as “blockage period” or “fish or cut bait” provisions which permit a senior lender to prevent interest payments from being paid on subordinated debt if the covenants on the senior debt has been breached.
Preferred stock also can have any number of attributes. It may be cumulative, non-cumulative, have conversion rights (to common equity) and rights to take voting control of the company under certain conditions.
When the collateral value limits the amount of senior secured debt, Mezzanine may be a viable alternative.
See what All Commercial Finance can do for you?
There are many options for those who have a good idea, but do not have the resources to put it into practice. Not being able to bankroll the expected equity capital injection or down payment is one thing but not having the financial capacity to hire professional investment banking services allowing you to benefit the most from the private capital market is another. Contributing to the cost associated with your funding request proves your confidence and commitment to what you are trying to convince others to invest in. Being the primary beneficiary of the rewards from the business-project, you must always be the lead investor in your own endeavor..
There are many financing formats, each with its pros and cons, and we must not forget that each form has its "price", and not exactly a monetary one. In addition each one has a different opportunity cost with what before resorting to one or the other, it is essential to be very clear since we need the money and at what price we are willing to pay for it.
Taking advantage of a low cost finance opportunity, using "creative" way it is possible to do the validation of your commitment to your project with a few thousand dollars (sometimes even less). If we turn to the famous "3F (Friend, Fool or Family)" we could not only get a little capital with which to start validating the model, but we will give future investors a proof of our absolute faith in the project.