DEBT OR EQUITY? 245
Later equity
When your business is gaining a foothold, after a few months or years, working
relationships are good places to look for equity. With an attractive win-win
proposition (boosting both businesses), you might persuade suppliers, your
channels to market (re-sellers, independent service providers), or other joint-
venture partners to buy some of your equity.
Investment companies specialising in corporate finance and institutional investors
(pension and life assurance funds with cash to invest) are generally looking for
lower-risk investments with a stronger promise making good returns. Public
offerings – stock market listings – generally require a great deal of planning and a
three-year track record.
Debt
You can look to the same sources for debt (family and friends may be good for
short-term loans).
The most obvious additions to the list are banks (not just for straight loans – some
start-ups have been financed using credit cards). Note that merchant/investment
banks often provide creative loan finance.
Factors – possibly banks but also specialised businesses – will buy your accounts
receivables at a discount from the book value and use their specialist debt collectors
to call in the money. This can be a useful way to convert an asset into cash.
Leasing has already been discussed as another way of easing cash flow pressures
when you acquire assets (or a way of unlocking existing balance sheet value). Again
check the banks as well as established leasing companies and equipment suppliers.
Building societies/savings and loans associations will sometimes lend against
real estate. Some are even turning into banks – don’t necessarily believe what their
name suggests.
Other
Do not forget to explore the assistance that you might be able to receive from
central government, federal, state and local authorities and non-government
agencies such as the European Union or the Asian Development Bank. This can
take the form of loans, research or development grants or – very occasionally –
equity investment.
246 CHAPTER 10 FUNDING THE BUSINESS
Private foundations sometimes make grants, especially for environmental,
developmental, cultural and arts-related activities.
Finally, if you have a good business proposition or intellectual property (special
technology, a unique way of doing something, a good brand image) you might be
able to license or franchise its use to other companies, perhaps overseas or in a
market that does not interest you – often for large amounts of money.
Variations, hybrids
We have talked as if your choice is exclusively debt or equity. There are interesting varia-
tions and hybrids that can make your proposition look more attractive.
Investors sometimes try to limit their risks and increase their options by providing
you with a loan (debt – perhaps with a floating charge over your trading assets)
that commits you to repaying the interest and principal but also gives them the
opportunity to convert some of the loan into equity or buy equity at some pre-agreed
price when they see how things are going.
Management buyouts (MBOs) often include a similar mix of debt and equity –
sometimes known as mezzanine finance.
Preference shares rank before ordinary shares in the event of liquidation, and
offer a slightly better guarantee to investors. Cumulative preference shares
promise the same, plus a guaranteed dividend that can be deferred, rolled up
(cumulated) and paid when cash flow permits.
We’d rather risk being trampled by you
Amazon.com is now the world’s largest online retailer and the world’s largest book
store, with profits of over US $1 billion in 2010. Yet in 1994 founder Jeff Bezos failed
to obtain backing from anyone in the book trade. The obvious sources of finance
– existing corporations that could gain from (or later be trampled by) your vision
– are almost always not interested. Amazing but true. (See also Test marketing
Chapter 8 and the many anecdotes in Chapter 12.) What do your people say when
someone brings them a new idea?
t
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