According to VentureOne and the Ernst & Young Quarterly Venture Capital Report, in 2003, venture capitalists and investors allocated more than $18 billion to promote young American companies. Less risk records and reports are risk leasing activities and quantities. This form of equipment financing has made a significant contribution to the growth of US start-ups. Each year, special leasing companies invest hundreds of millions of dollars in start-ups, enabling savvy entrepreneurs to achieve maximum benefits. Financing growth. What is risk leasing? How can sophisticated entrepreneurs maximize corporate value through this financing? Why is risk leasing financing the equipment needed in a cheaper, cheaper way than venture capital? To get the answer, this relatively new and expanding form of equipment financing must be carefully studied and designed specifically for start-ups supported by fast-growing venture capital.
The term risk leasing describes equipment leasing to start-ups funded by venture capital investors. These companies typically have negative cash flow and rely on additional equity rounds to achieve their business plans. Risk leasing allows growing start-ups to get the operational equipment they need while retaining expensive venture capital. Equipment provided through risk leasing typically includes essentials such as computers, laboratory equipment, test equipment, furniture, manufacturing and production equipment, as well as other automated office equipment.
It is wise to use risk leasing
Risk leasing has many advantages over traditional venture capital and bank financing. Financing new businesses can be a high-risk business. Venture capitalists often require companies with financing to compensate for this risk to have substantial equity. They usually seek a return on investment of at least 35%-50% on their unsecured, non-amortized equity investments. An initial public offering or other equity sale within three to six years of investment provides them with the best way to get this return. Many venture capitalists require board representatives to specifically opt out of time frames and/or investor rights to enforce liquidity events. In contrast, risk leasing does not have these shortcomings. Venture capitalists usually seek annual returns in the range of 14%-20%. These transactions are usually repaid monthly for two to four years and are guaranteed by the underlying assets. Although the risks of venture capitalists are high, this risk can be mitigated by transactions that require mortgages and build amortization. By combining venture capital and venture capital, savvy entrepreneurs reduce the overall cost of capital for venture capital, building corporate value faster and retaining ownership.
Risk leasing is also very flexible. Startups can cut monthly payments by building a fair market value purchase or renewal option at the end of the lease. Lower payments result in higher revenue and cash flow. Since fair market value choices are not obligations, tenants have a high degree of flexibility and control. The resulting reduction in payments and the transfer of lease fees beyond the transaction period can provide a higher corporate value for savvy entrepreneurs during the initial lease period. Higher corporate value comes from the ability of startups to achieve higher returns, and most valuations are based on this.
Compared with traditional bank financing, customers benefit more from risk leasing in two ways. First, risk leasing is usually only guaranteed by infrastructure equipment. In addition, there is usually no restrictive financial contract. Most banks, if they provide loans to early companies, need to provide full liens to all companies. assets. In some cases, they also demand guarantees for start-ups. principal. More and more sophisticated entrepreneurs recognize the stifling effects of these restrictions and their impact on growth. These young companies are less attractive to other sources of financing when start-ups require additional funds and the only lenders have accumulated all of the company's assets or required guarantees. Correcting this situation may weaken the interest of entrepreneurs. Time and energy.
How does risk leasing work?
In general, a round of major equity capital raised from creditor investors or venture capitalists makes risk leasing feasible for early companies. The lessor builds most of the transactions into a main lease line, allowing the tenant to draw lines as needed during the year. Lease lines typically range in size from $200,000 to $5,000,000, depending on the tenant's needs and credit intensity. Terms are usually paid between 24 and 48 months, and paid in advance each month. The credit strength of the lessee, the quality and useful life of the infrastructure, and the expected ability of the lessor to re-sell the equipment during the lease usually determine the initial lease term. Although no lessor enters the lease arrangement and expects to re-sell the equipment before the lease expires, lssee's business fails and the lessor must seek this recovery path to save the transaction. Most risk leases give the tenant a flexible lease term option. These options typically include the ability to purchase equipment, renew leases at fair market value, or return equipment to the lessor. Many lessors limit the fair market value, which also benefits the lessee. Most leases require the lessee to assume important equipment obligations, such as maintenance, insurance, and equipment taxes required for payment.
The risk tenant's goal is the tenant's prospects, which have good commitments and may fulfill their leases. Since most start-ups rely on future equity rounds to execute their business plans, the lessor places great emphasis on credit review and due diligence – assessing the capabilities of the investor community, the efficiency of the business plan, and the background of the management. A good management team has traditionally proven the previous success of the new business's active field. In addition, management's expertise in key business functions - sales, marketing, R&D, production, engineering, finance - is critical. Although many professional venture capitalists finance new businesses, their capabilities, endurance and resources may vary widely. Better venture capitalists can achieve excellent results and have direct experience with the types of companies that receive funding. The best venture capital firms have developed industry specializations. Many venture capital firms have in-house experts who have direct operational experience in the industry involved. For venture capitalists, it is also important that venture capital provide the amount of capital invested. And the amount allocated to future financing rounds.
After determining that the management team and venture capital investors are qualified, the venture capitalists assess the business model and market potential of the startup. Since most venture capitalists are not technical experts - able to evaluate products, technologies, patents, business processes, etc. - they are very concerned about the due diligence of experienced venture capitalists. However, experienced venting is less independent assessment of the business plan and careful due diligence to understand its content. Here, the lessor usually tries to understand and agree to the business model. Questions to answer include: Is the business model reasonable? What is the market for potential customers' services or products? Is the income forecast realistic? Is the pricing of the product or service sensitive? According to the forecast, how much cash is there and how long? When do you need the next round of equity? Do key personnel need to implement a business plan? These and similar questions help determine if the business model is reasonable.
Satisfied with the reasonableness of the business model, venture capitalists are most concerned about whether the startup has sufficient liquidity or cash to support a large part of the lease term. If the joint venture fails to raise additional funds or exhausts cash, the lessor is unlikely to receive further lease payments. To reduce this risk, most experienced venture capitalists look for start-ups with at least nine months of cash or sufficient liquid assets to serve most of their leases.
Get the best deal
What determines the risk of leasing pricing and how the potential tenant gets the best deal? First, make sure you are satisfied with the rental company. This relationship is usually more important than transaction pricing. With the rapid increase in risk leasing over the past decade, a capable national leasing company is now focusing on risk leasing. A good venture capitalist has a lot of expertise in this market, is accustomed to working with start-ups, and if start-ups deviate from the plan, they are prepared to help deal with difficult cash flow situations. In addition, best-invested investors offer other value-added services – such as assisting equipment acquisitions at more favorable prices, trading existing equipment, finding additional sources of venture capital, working capital, factoring, temporary CFOs, and introducing to potential strategic partners.
Once a startup finds a capable venture capital, negotiating a fair and competitive lease is the next business order. Many factors determine the lease pricing and terms. Important factors include: 1] the tenant's perceived credit strength, 2] equipment quality, 3] market interest rates, and 4] competitive factors in the risk leasing market. Since leasing can be built through a variety of programs, many of which affect the final rental cost, start-ups should be more competitive leasing...
Orignal From: Risk leasing - a smarter way to build enterprise value
No comments:
Post a Comment