There's money to invest, some of it from "angels."
Having difficulty securing capital for much needed investment in your plant? Believe it or not, there is money for companies with well thought-out business plans, and especially for people who put their own net worth on the line.
There are three primary sources of capital and a fourth that’s becoming useful for small to mid-market private companies.
The first is from owners. Internal equity capital comes from shareholders and business profits.
Lenders are a second common source. Loans depend on the state of a company’s balance sheet and income statement. Money from financial institutions is secured by accounts receivable and inventory.
A third, more common source of capital is arranged through trade credit with suppliers.
A fourth and less publicized method comes from an angel investor (also known as a business angel, informal investor or angel funder). This affluent individual provides capital for business start-ups, usually in exchange for convertible debt ownership equity.
A small but growing number of angel investors organize themselves into groups or networks to share research, pool investment capital and provide advice to their portfolio companies.
There are more than 30 of these groups in Canada, many of them members of the non-profit National Angel Capital Organization (NACO). It provides angel investors with a network of peers and includes a useful membership list that companies seeking funds can reference.
NACO notes that the OECD estimates angels invest between $500 million and $1-billion annually in Canada’s growth-oriented companies.
Traditional lenders are fairly rigid about terms of financing and as a result of the recent credit crunch, there are few tangible assets left to use as collateral. The deciding factor becomes the willingness of an owner to share the business. Where control is a priority, debt leveraging becomes the single outlet for financing company objectives. It should be noted, however, that in today’s economy, highly leveraged companies carry a heavy burden of risk.
The burden of risk appears in two principle categories. Senior debt, generally the least restrictive, depends on the company having a strong asset base value. Subordinate debt is a type of capital that’s usually unsecured or ranks behind the security position of the senior debt lenders.
Using non-traditional lenders, including equity partners, is a more conservative and risk-averse method of raising capital, but there’s a trade-off in terms of control. Equity partners may not require the leveraging of assets but those injecting significant capital will likely want a seat at the management table.
Mark Borkowski is president of Toronto-based Mercantile Mergers & Acquisitions Corp., which specializes in the sale of privately held companies.
This article appears in the September 2014 issue of PLANT.
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