A Loan Before a Milestone
Prior to completing an IPO or M&A transaction, a company quite often needs to bolster its cash balance for strategic reasons, including improving its negotiating position. A Venture Lending loan enables management to quickly access needed capital while minimizing dilution and adding credibility to the company.
An example of a Venture Loan taken before a milestone (breakeven point):
A startup company calculates it needs $3mm until its break even point. It is debating between two amortized loans; with a short (3 months) or a long (18 months) grace period.
When shopping for a loan, the first step is to clearly understand when is the cash needed.
For instance, are $3mm required in day one or over the course of the coming quarters to cover a dip in future cash flow?
Obviously both loans cannot be priced identically. A loan with a short grace period will incur a smaller equity kicker. However, when taking into account 10% interest, a loan with a 3 month grace period will have to be a $5.5mm loan in order to provide the company with the $3mm needed. This means the company has taken on an unnecessary large loan. The loan with the 18 months grace will need to be a $3mm loan only.
Despite the supposedly more expensive price this option turns out to be a less expensive alternative and is a superior option!
Remember: simplistic structure can result in an expensive facility
Account Receivables Financing
A revenue stage company with top tier customers had an A/R balance of $1.5mm and was seeking financing. One of the options it was considering was A/R financing. A/R Financing is a secured credit line where receivables are pledged as collateral. By taking an A/R line, the company can optimally decide how much cash to draw, when to draw and when to terminate the line. In consideration for the line, lender receives interest, fees and an equity kicker.
Companies that can use this vehicle need to be ones that provide customers with industry-standard payment terms. The amount that can be drawn from the line depends on the company’s actual receivables.
The company decided to proceed with a Plenus A/R line. Plenus provided it with rapid access to capital through a straightforward process that resulted in timely responses. A Pay as You Go model ensured that it didn’t commit in advance to the length of the facility. As its receivables will grow so will the option of enlarging the A/R line, providing the company with increased flexibility. Granted on a revolving annual basis, the facility can be terminated each quarter and payments are only for quarters when the facility was open.