Foundations of New Venture Finance 273- Does it let the company borrow against the future? TPL, a technology-equipment
manufacturer in Albuquerque, won a big U.S. Army contract and then discovered
that their bank wouldn’t increase their existing $250,000 line of credit. Another
bank 100 miles away heard the TPL story through the grapevine and extended them
the half-million dollars they needed, saying, “You’re the kind of company we need
to encourage in New Mexico.” - Does it find customers for the firm? A bank in Southern California played match-
maker for two of its customers, garment manufacturer Flap Happy and the local sci-
ence museum. When the museum expanded its gift shop, Flap Happy hats were
included in the retail mix.
These stories demonstrate that some commercial banks are willing to “go the extra
distance” to attract small business customers. Entrepreneurs need to shop around and
communicate to find a lender who can be a true partner in their success. However, there
are times when bank financing is simply not available. Are there other options for entre-
preneurs? Here are two: - Merchant cash advances: If a company sells primarily to customers using credit
cards and is in dire financial straits, it might be eligible for a merchant cash advance.
For example, AdvanceMe, Inc., of Kennesaw, Georgia, which specializes in credit-
card-receivable financing, will advance small amounts to merchants and receive
repayment by garnishing a small percentage of each credit-card sale. Interest rates
are high, between 20 and 35 percent, but the money is received quickly and the
merchant needs no collateral.^23 - Micro-mezzanine financing: Sometimes a business is profitable but has no more
debt capacity. Venture capital is not available or advisable because of the large equi-
ty shares taken by the VCs. Micro-mezzanine financing is unsecured subordinate
debt that can help a business fund an acquisition or an expansion, or even buy out
another investor. It is called “mezzanine” becausee it lies between bank debt and
outside equity financing. One mezzanine investor, Snowbird Capital of Reston,
Virginia, lends amounts between $500,000 and $5,000,000. Interest rates are in the
range of prime plus 5 percent, maturity is five to seven years, and the investor wants
warrants to purchase stock in case the firm goes public.^24 (Warrants are covered in
Chapter 8.)
Types of Debt Financing. The two basic types of debt financing are asset-based financ-
ing and cash flow financing. Asset-based financing is collateralized. The most common
form of asset-based financing is trade credit. Trade credit covers the period between
product or service delivery to the new venture and the date when payment is due. It is
not uncommon to have a 25- to 30-day grace period before payment without penalty is
expected. A discount is sometimes offered for early payment.
Asset-based financing is simply borrowing money to finance an asset, short-term—
seasonal accounts receivables—or long-term—equipment or property. When a specific
asset is identifiable with the borrowing need, asset-based financing is appropriate. Table
7.2 illustrates some types of bankable assets and the typical maximum percentage of debt
financing the firm can count on.