Alternative Financing Sources For Privately Held Companies
by Mike Ryan, President and Founder of Worldwide Capital and Mergers, LLC
During this difficult financial time even non-cyclical companies can have a difficult time obtaining traditional bank loans. Many options are available in the event that a company cannot obtain traditional financing or the owner does not want to be burdened with any more bank debt. Many clients are selling part or all of their company in order to raise cash for the business's operational needs. Investors are seeking investments include venture capital, private equity, strategic investors and private investors. Companies that want to give up limited or zero equity are getting funded with mezzanine financing, convertible debentures and other forms of subordinated debt. In most cases a blend of these financing types is used in order to get you the funds you need to grow. Our complimentary business capital review will identify the best course of action for you based on your goals and situation.
The first example below illustrates how a company raises cash for operations by selling part of the company. The second demonstrates a mezzanine investment. The third describes my favorite and most common investment type - the convertible debenture.
Sell part of the company to raise cash -- We bring in a venture capital, private equity fund, strategic investor or a high net worth individual to buy a percentage of your company. The cash goes into the company giving you funds to grown and expand. Your company stays independent of the investor and you continue to run the business under your company name. You will earn a fair market salary plus continue to own part of the company. Any transaction between you and the investor will be at an arms length (i.e. help with financing, help in buying equipment, etc...).
Mezzanine Loan-- We bring in an investor or mezzanine fund that will make the loan. These loans are only used if you cannot obtain traditional financing. The interest rate is significantly higher than a bank loan. The advantage of a mezzanine loan is that the owner does not give up any equity in the company. Again, you would only use this loan if you cannot get a bank loan for any reason.
Convertible Debentures -- We bring in a venture capital, private equity fund, strategic investor or a high net worth individual to make this investment. The convertible debenture is my favorite choice and one of the most common choices for both business owners and investors. A convertible debenture is a hybrid of a loan and an equity investment. The money initially injected into the company is in the form of a loan with a fairly low interest rate. The loan has a convertible or equity kicker that usually comes into play after three years. This allows the investor to participate in the success of the company with an equity kicker payment. This gives the investor a modest return if the company does not meet their goals and a substantial return if the company succeeds. The business owner keeps 100% of the company and can afford the interest and equity kicker as the payments to the investor are contingent on success.
Relatively simple moves or some of the more complex examples like the ones outlined above can help you ensure you have the capital you need to grow and expand your company. Whether you are distressed or just want to increase your cash position, please call Worldwide Capital and Mergers, LLC at 1-866-603-4142 for a complimentary Business Capital Review to learn what options are best for you.