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