| The rise of venture leasing and lending has created | | | | venture loan. |
| an opportunity for sophisticated entrepreneurs to | | | | 6. To bridge-finance equity transactions. Occasionally, |
| gain a competitive advantage. Savvy entrepreneurs | | | | start-ups are able to obtain short-term loans to |
| are using venture leases and loans to generate | | | | bridge upcoming equity transactions. These loans are |
| millions of dollars for shareholders by leveraging | | | | usually well secured by all-asset liens against these |
| existing venture capital. They have discovered ways | | | | companies and are generally available for short time |
| to use this flexible financing as a tool to build | | | | frames. Most venture lenders who provide this type |
| enterprise value between equity rounds and to | | | | of financing require equity kickers in the form of |
| leapfrog less sophisticated competitors. | | | | warrants to purchase stock in the start-ups or stock |
| Venture leases and loans are usually asset-based, | | | | issued directly to them by the start-ups. |
| financing arrangements. These financings are available | | | | 7. To hedge against rapidly depreciating equipment. |
| to qualified pre-profit, early-stage companies funded | | | | Venture leases can be structured as |
| by venture capital investors. Start-ups need | | | | fair-market-value leases. These leases usually allow |
| equipment and working capital to help them execute | | | | the lessees to renew the leases at fair-market-value |
| their business plans and to reach profitability. Venture | | | | renewal rates, to purchase the equipment at |
| lenders and lessors provide financing to these firms | | | | fair-market-value purchase prices, or to return the |
| to help them acquire computers, lab and test | | | | equipment to the lessors at the end of the leases. |
| equipment, production equipment, phone systems | | | | The return option allows the start-ups to |
| and other needed business equipment. | | | | conveniently dispose of obsolete or unneeded |
| These specialty financing firms may also provide | | | | equipment. |
| financing for working capital in the form of accounts | | | | 8. To replace venture capital. Start-ups are using |
| receivable and/or inventory loans. Start-ups that | | | | loans in the form of subordinate debt as a substitute |
| qualify usually have promising business prospects, | | | | for additional equity rounds. These loans can be |
| well-defined business plans and have raised more than | | | | collateralized or unsecured and can be used for many |
| $ 5 million in venture capital from reputable venture | | | | of the same purposes as equity funding - to continue |
| capitalists. | | | | product development, to add key personnel, to |
| How are these savvy entrepreneurs using venture | | | | expand marketing and to support sales efforts. |
| leases and loans to boost shareholder value and to | | | | Venture lenders generally charge a premium rate for |
| gain an edge on the competition? Here are some of | | | | these loans and require sizeable equity kickers in the |
| the ways: | | | | form of warrants or ownership shares in the |
| 1. To stretch equity capital and to increase | | | | start-ups. These loans are generally cheaper than |
| shareholder value between equity rounds. By using | | | | equity financing and may amortize faster. |
| venture leases and loans, entrepreneurs can forestall | | | | 9. To spread equipment cost over the productive life |
| going out for more equity while they continue to build | | | | of the equipment. By being able to spread the cost |
| and increase the value of their companies. | | | | of the equipment over an extended period, start-ups |
| 2. Use of loans and leases instead of internal cash | | | | can get productivity out of these assets while they |
| helps to stem negative cash flow. Most start-ups are | | | | pay. Paying for the assets out of internal cash has |
| faced with negative cash flow until revenues build | | | | just the opposite effect. |
| sufficiently to cover costs. Using limited internal cash | | | | 10. To quickly build out infrastructure to allow all |
| for equipment purchases, to invest in inventory or | | | | employees to be more productive sooner. Venture |
| for accounts receivable is not wise, if there are | | | | leasing and lending allow start-ups to add computers, |
| better options. | | | | phone systems, networking equipment, software and |
| 3. To protect working capital. Purchases of | | | | other business essentials quickly. Employees can be |
| intermediate-term assets with internal cash will | | | | more productive sooner and benchmarks can be |
| remove those funds from working capital. Use of | | | | reached faster. |
| venture leases and loans helps to keep the pressure | | | | Using venture leases and loans is a smart choice for |
| off of working capital as the cost of these assets | | | | savvy entrepreneurs. It allows them to build |
| gets spread over an extended period. | | | | substantial equity value with minimal dilution. These |
| 4. To supplement other capital sources. Venture | | | | arrangements usually do not require board |
| leases and loans supplement equity capital, mortgage | | | | representation or loss of management control. |
| financing and other financing available to start-ups. | | | | Start-ups are able to add needed equipment and |
| 5. To liberate cash from equipment, accounts | | | | finance working capital with lots of flexibility. |
| receivable and inventory already financed internally. | | | | Additionally, these forms of financing are significantly |
| By doing a sale-leaseback, the start-up can liberate | | | | cheaper than the likely alternative, more venture |
| cash from equipment already owned. Likewise, the | | | | capital financing. Savvy entrepreneurs have |
| start-up can finance inventory and accounts | | | | discovered these advantages and are using them to |
| receivable that have been funded internally by using a | | | | put their firms ahead of the pack. |