Knowing the Importance of Growth Capital in a Business Cycle

Most often a high-growth and mature companies look for funding to increase their profit, to expand, to restructure operations through organic approach, to enter new markets, or to finance a significant acquisition without a change of control of the business. These companies seek for growth capital to finance a major transformation of their business. 

Growth capital is a form of private equity investment in a late-staged level of a business life. Financial institutions tend to provide this capital to businesses who are able to generate revenues and operating profits, and to those companies who have already reached a stable point where they are capable of exploring opportunities or expansion but unable to generate sufficient funds.  Financial firms who provide growth capital support businesses that have market leadership potentials.

Growth capital is also known as growth equity and expansion capital. It exists at the intersection of private equity and venture capital and it is provided by a variety of sources. Companies who seek for growth capital are likely to be more mature than venture capital funded companies because they have already established their revenues that are already proven in markets or industries. Because of insufficient funds these companies generally can find alternative conduits to obtain capital for growth and expansion. 

Growth capital is often structured as either Common equity - a type of capital used to directly absorb losses; or Preferred equity - a measure of equity which only takes into account the preferred stockholders, and disregards the common stockholders. While other investors also use various Hybrid securities that include a contractual return such as interest in payments, in addition to an ownership interest of the company. Hybrid securities are group of securities combining debt and equity, the elements of the two broader groups of securities. It behaves more like fixed interest securities while others behave more like the underlying shares into which they convert.

There are numbers of dedicated growth equity firms around the United States that can provide the financial needs of your business development. The amount of capital that can be produced would range anywhere from $2 million to $100 million, depending on the firm and whether they would take a majority or minority investment in your company. Since this type of financial service involves a great amount of capital, therefore it is best to partner with financial firm who have time-tested and battle-hardened fund raising techniques, who do not just provide you financially but coaches you as well, and most importantly, who delivers service with the highest sense of integrity.

How to Apply for Startup Loans or Seed Capital After your Bank Declined

So your bank declined after complying with all the requirements necessary in applying for a startup loan? It is very discouraging when after all the efforts you have invested in and the time consumed of securing all the documents needed, you were still rejected by your bank. This loan rejection could affect your business lines of credit for future business loans. But do not take it personally because there are always challenges when going through the business loans application process. Try to stay calm and find out why your application was not approved.

It is imperative to know and understand why your loan application was not approved by your bank. Most of these financial institutions would not go through the details as to why your application was declined because they are afraid they might be offending you, but knowing the reasons why can be crucial to your business success and it can be very helpful in your subsequent business loan applications. You may ask your lending officer politely and tell him that you understood why they would not be able to help you; however, you need to know the reasons of their disapproval in preparation for your next loan application.

After being turned down from your local bank, stay calm and do not lose your hope. The rejection of your loan application may only reflect the financial health situation of the bank, perhaps the bank is not really in good financial shape and are only offering loans to their best valued customers. But it does not mean that you are not one of their best valued customers, perhaps these clients are their loyal customers who have been in business with them for such a very long time. If you have been their client for such a very long time as well, perhaps you were the last one to apply.

There are few best options left for you in acquiring startup loans or seed capital for your startup business.  Your best solution is to look for a financial firm that offers unsecured business loans which do not demand for many requirements unlike your local conventional bank. It is best to partner with this type of unsecured business financing firm who understands your financial needs and helps you obtain unsecured business lines of credit.

There are angel investors network as well that can provide you seed capital that eliminates unnecessary applications which could also have resulted in disapproving your previous business loan application. This network of investors may help you analyze your business plan, offer essential coaching for entrepreneurs seeking to raise venture capital, and will work with you to accomplish your goals. Partnering with angel investors for your startup business enables your business to succeed and they will continue to help your existing business for future expansion. 

There are several financial institutions other than banks where you can obtain business funding for your startup business or business expansion. If you are not familiar in your area, you may search on the internet and apply through online, or you may call their hotline numbers and they would be happy to assist you with your financial needs.

The Need of Acquiring an Unsecured Business Loan

Unsecured business loan is commonly used by borrowers for start-up businesses, or even for small purchases such as computers, office or home improvements, or unexpected necessary expenses. It is a type of loan that is not collateralized by lien - the right to take a property if an obligation is not met or in the case of bankruptcy. It is a debt granted to borrowers that is supported only by the strength of the borrower’s credit history, reputation, potential earnings, and other assets owned by the borrower. 

Unsecured business loan is also called Signature loan because the lender only takes the borrower’s word for it (that is why it is also called as Good Faith loan) and has nothing to acquire but his or her signature. The lender can not take any possession such as house, lot, car, or any valuable belonging. The borrower signs a promissory note stating the terms and conditions, that the loan will be paid over an agreed period of time but typically for a short term only, usually a period of 1 to 5 years. The lender will ask a co-maker or guarantor to sign the note as well, pledging to pay the unsecured loan in the event of failure to pay at the agreed time by the main borrower.

This takes higher risk compared to secured loans so the interest rate for unsecured business loan tends to be much higher and a lump sum payment is usually required. However, for people who do not have any collateral to pledge, this unsecured business funding is very much appealing. Apart from that, some unsecured business financing firms offer processes that help eliminate unnecessary applications that may result rejection. This could possibly damage the borrower’s unsecured business credit lines along the way and hinder their ability to qualify for future loans. Having a good credit standing is imperative in acquiring this loan because the better your credit history is, the lower is your interest rate and the higher loan amount you can get.

Hiring a Placement Agent to Market Mezzanine Capital and Growth Equity Investors

A placement agent is a financial firm who act as an intermediary in the world of fundraising. Sometimes it is an individual but more often a firm, who assists entrepreneurs, private companies, or institutional investors who are willing and capable of investing a private equity fund. Basically, they match cash-hungry funds with cash-rich investors. They are often structured as groups within huge investment banking firms such as Credit Suisse Private Fund Group and UBS Investment Bank, or as separate boutique investment banks such as MVision Private Equity Advisers and Campbell Lutyens.

In the context of private equity, a placement agent serves several functions for a company such as raise mezzanine capital or venture capital, as well as raise investor commitments to new private equity funds. The market is very competitive especially with the advancement of media and technology, and the need of a placement agent is now certainly arising in this new economic environment. They are crucial to fundraising for emerging markets of private equity funds.  

A company usually hires a placement agent in order not to spend too much of its own time seeking for mezzanine capital or growth equity investors. Sometimes the lender also commissions an agent so that the fund partners can aim attention at management issues rather than focusing on how to raise venture capital. Mounir Guen, chief executive of MVision says, “A placement agent is a necessity.”  Why? “Because if the job is done well it brings a level of sophistication and experience to the fundraising process.” This is because financial institutions have become more crucial and sophisticated in evaluating potential investments.

In the past, these agents were hired to introduce private equity funds to the investors or to what they termed as limited partners (LP), and simply congratulated after a job well done. But today, they are highly valued advisors who understand and know their limited partners and the market’s appetite for different approaches. They also advise and assist fund managers and help develop marketing strategies. Their critical responsibility is constantly trying to satisfy their limited partners and value their judgment in order to establish long term and deep relationship.

Placement agents can bring a myriad of relationships with growth equity investors, mezzanine capital firms, or venture capitalists. They can cherry-pick investors that are likely to come into a particular fund, increasing efficiency and minimizing risk in the fundraising project, according to James Coleman who joined Deloitte LLP after UBS Investment Bank, two of the globally known financial services firms. They can also advise some existing owners of private equity assets on secondary market sales of their interests.

Placement agents are mostly compensated through fees ranging from 1 percent to 3 percent by the companies or individuals who raise capitals. Sometimes their fees and terms of engagement would extremely vary depending on the length of time to execute the fund and based on the amount of money raised.

The Significance of Mezzanine Capital in Funding a Business

Mezzanine Capital, also known as Mezzanine Debt, is a type of liability funding that comprises equity-based option, such as rights and warrants, and a lower-priority debt. It is a hybrid debt matter that is in subordinate to an existing debt, a debt provided by senior lenders such as banks and venture capital investors. It is frequently used in financing acquisitions and buyouts where it can be used to prioritize new owners ahead of existing owners in the event that a bankruptcy occurs. It basically gives the lender the right to assume ownership of the company if the debt is not paid back in time and in full.

Mezzanine capital is commonly used by companies beyond the start-up phase but before initial public offering or IPO, to fund the last stage of the projects or to fund unexpected operational costs before going public. This unsecured form of funding usually involves attachment of security interest to the stock of a corporation and does not attach a security interest on its physical asset. Because mezzanine debt is unsecured, lenders typically charge a higher interest rate more than on senior debt instruments. For some riskier projects such as real estate business, the interest rate differs significantly. Hence, many companies try to seek other less expensive forms of debts before acquiring mezzanine debt.

Mezzanine debt behaves more like a stock than a debt because of the enclosed options that include stock call options, rights, and warrants. Oftentimes it is an expensive source of funding than secured debt or senior debt. Nevertheless, it is advantageous because it is treated more like equity on a company’s balance sheet and may make it easier to acquire standard bank financing. It does not require collateral and no typical inspections just like in a typical conventional lender, thus, providing the mezzanine capital quickly. However, if the borrower defaults, the lender therefore will be entitled to receive ownership interests in the entire corporation, including all physical assets and liabilities. 

Companies who invest mezzanine capital should be profitable. They must have proven track record in their chosen industry with established reputation and product, a history of profitability, and should have a viable expansion plan to draw attention for future mezzanine funding. These are typically what these lenders look for since they offer high return of investment with high risk, and a placement agent is hired accordingly. They are an outside firm who would help market the lender’s fund to institutional investors.

What You Should Know About Angel Investors and Venture Capitalists

Angel Investor is also known as business angel or informal investor. The term Angel originally comes from Broadway that was used to describe wealthy individuals who provided money for theatrical productions. Angel investors are opulent individuals who organize themselves to provide seed capital for start-up businesses and share their knowledge to an entrepreneur on how to run the business. They mentor another generation of entrepreneurs by making use of their wide experiences and networks. Most of these investors are retired entrepreneurs or executives who are interested in investing their money and wanted to stay abreast of the business development apart from monetary return.  They are also good sources of useful contacts allowing entrepreneurs the opportunity to network with others in their industry.

According to a Harvard report by William R. Kerr, Josh Lerner, and Antoinette Schoar, start-up companies funded by angel investors are less likely to fail than those companies who rely on other forms of initial financing. Financial institutions like banks offer loans to entrepreneurs but they demand for payment of interest on the invested capital, while angel investors usually get considerable control over company’s decisions, apart from owning a significant portion of the company. 

Venture Capitalists, on the other hand, contrive the merged money of others in a professionally-managed fund. They are corporate entities that pool money from a range of institutional and individual investors. They usually possess greater expertise in leading companies through successive funding stages leading to an Initial Public Offering or IPO. For new companies with limited operating history and are too small to raise capital in the public markets, small companies that have not yet reached the point where they are able to obtain a bank loan or complete a debt offering,  Venture Capital is very much appealing. 

 Venture Capital firms are much less likely to invest in startup companies at the seed capital stage. This is because the range of venture capital transaction is large around US$500,000 to US$10 million, or above while the range of angel investor transaction is typically from US$25,000 to US$100,000 for an individual, and up to US$1 million, or more, when acting in a group. However, Venture capital may provide second round financing after angel investors.

The Difference between Angel Investors and Venture Capitalists

I have been doing some optimization jobs for entrepreneurs and investors’ website, but I do not have a full knowledge on what the business is really all about. All I know is that, this is about business investment, yet, I still can not figure out how it goes, and how it works. Until I made a little research, I completely understood on what type of business this website is offering.

I admit this is the first time I have encountered the words Angel Investor and Venture Capital. From my own point of view, without having knowledge yet of what an Angel Investor means, I thought it is an individual who seems like an angel lending his money to those who need capital for investment. And perhaps some necessary procedures must be followed and legal documents must be secured for this is a financial matter that is always a very sensitive case in regards to business.

According to Wikipedia, an Angel Investor is also known as business angel or informal investor, an affluent individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity. The term Angel originally comes from Broadway that was used to describe wealthy individuals who provided money for theatrical productions. http://en.wikipedia.org/wiki/Angel_investor

My own perception was not quite far from what Wikipedia has explained. So, Angel Investors typically invest their own fund. These opulent individuals organize themselves to share research and merge their own investment capital. Most of these investors are retired entrepreneurs or executives, who may be interested in angel investing for some reasons that go beyond monetary return, such as being  acquainted with the latest developments in the business sector, and mentoring another generation of entrepreneurs by making use of their experience and networks on a less than full-time basis.

According to a Harvard report (by William R. Kerr, Josh Lerner, and Antoinette Schoar), start-up companies funded by Angel Investors are less likely to fail than those companies who rely on other forms of initial financing.

Venture Capitalists on the other hand, contrive the merged money of others in a professionally-managed fund. It is a capital provided to early-stage, high potential, growth start-up companies. The venture capital fund makes money by owning equity in the companies it invests in, which usually have a novel technology or business model in high technology industries, such as biotechnology, IT, software, etc. http://en.wikipedia.org/wiki/Venture_capital

 

For new companies with limited operating history and are too small to raise capital in the public markets, Venture Capital is very much appealing. Basically, these small companies have not yet reached the point where they are able to obtain a bank loan or complete a debt offering. Investing in small and less mature companies is risky for Venture Capitalists and so they usually get considerable control over company’s decisions, apart from owning a significant portion of the company.