The rise of venture leasing and lending has created an opportunity for sophisticated entrepreneurs to gain a competitive advantage. Savvy entrepreneurs are using venture leases and loans to generate millions of dollars for shareholders by leveraging existing venture capital. They have discovered ways to use this flexible financing as a tool to build enterprise value between equity rounds and to leapfrog less sophisticated competitors.
Venture leases and loans are usually asset-based, financing arrangements. These financings are available to qualified pre-profit, early-stage companies funded by venture capital investors. Start-ups need equipment and working capital to help them execute their business plans and to reach profitability. Venture lenders and lessors provide financing to these firms to help them acquire computers, lab and test equipment, production equipment, phone systems and other needed business equipment.
These specialty financing firms may also provide financing for working capital in the form of accounts receivable and/or inventory loans. Start-ups that qualify usually have promising business prospects, well-defined business plans and have raised more than $ 5 million in venture capital from reputable venture capitalists.
How are these savvy entrepreneurs using venture leases and loans to boost shareholder value and to gain an edge on the competition? Here are some of the ways:
1. To stretch equity capital and to increase shareholder value between equity rounds. By using venture leases and loans, entrepreneurs can forestall going out for more equity while they continue to build and increase the value of their companies.
2. Use of loans and leases instead of internal cash helps to stem negative cash flow. Most start-ups are faced with negative cash flow until revenues build sufficiently to cover costs. Using limited internal cash for equipment purchases, to Malaysia P2P investment in inventory or for accounts receivable is not wise, if there are better options.
3. To protect working capital. Purchases of intermediate-term assets with internal cash will remove those funds from working capital. Use of venture leases and loans helps to keep the pressure off of working capital as the cost of these assets gets spread over an extended period.
4. To supplement other capital sources. Venture leases and loans supplement equity capital, mortgage financing and other financing available to start-ups.
5. To liberate cash from equipment, accounts receivable and inventory already financed internally. By doing a sale-leaseback, the start-up can liberate cash from equipment already owned. Likewise, the start-up can finance inventory and accounts receivable that have been funded internally by using a venture loan.
6. To bridge-finance equity transactions. Occasionally, start-ups are able to obtain short-term loans to bridge upcoming equity transactions. These loans are usually well secured by all-asset liens against these companies and are generally available for short time frames. Most venture lenders who provide this type of financing require equity kickers in the form of warrants to purchase stock in the start-ups or stock issued directly to them by the start-ups.