This is a common scenario for early stage companies. They raised an initial round that got their product to market, got them selling, and now they have the orders, but they can’t deliver because they don’t have the capital to build the widgets or fund the salaries of their workers while the project is being implemented or software installed. They can try to go back out to their existing investors to get more money by selling more equity, or try to attract new investors and sell equity. The problem is that that want to sell it at a higher valuation so they can minimize the dilution of their own shares and their initial investors. Unfortunately without the new revenue and completely proving the business model, they may find it hard to justify a significantly higher valuation and that means more time to raise the capital. Time that they don’t have if they have a customer waiting on the product, service, or application to be delivered. It is the proverbial – Rock and a Hard Place.
What are their other options?
- Offer a Bridge Loan to their private investors — go back to their most ardent investors and ask them to provide a 90 day or 120 day note secured by the order and earn pure interest – reg lender rates + .5%. Roughly pay them 1.5% each 30 days on the loan.
- Seek Alternative Financing – Purchase Order or Contract Financing linked with Accounts Receivable Financing — In this scenario, an alternative lender provides a “letter of credit” for the “Cost” portion of the order. It is is tied to the order and the credit rating of the company issuing the order. The company draws down on that letter of credit to pay the specific things related to the order. When the order is shipped or delivered and billed to the customer, the financier flops the switch on the ‘factoring’ the receivable and pays off the letter of credit and advanced capital to company that is the difference between the letter of credit amount and the amount that equals 85% of the value of the full order. When the customer pays, the remaining 15 % is paid to the company less their financing and processing fees, usually about 10-12% more.
Learn more about how this works from an Angel Investor who is also a source for Alternative Capital from a previously recorded Podcast on the Compassionate Capital Radio Show:
Get more of the Inside Secrets to Angel Investing at http://AngelInvesting101.com