Alternative Financing Sources For Technology Companies

by Mike Ryan, President and Founder of Technology Capital and Mergers, LLC

During this difficult financial time many clients are selling part or all of their technology company in order to raise cash for the business's operational needs. Investors include venture capital, private equity, strategic investors and private investors. Companies that want to give up limited or no equity are getting funded with mezzanine financing, convertible debentures and other forms of subordinated debt.

Before these steps are taken, however, a company should first undertake simple internal means to improve cash flow. These can include factoring, selling excess equipment, putting off new capital expenditures, reducing inventory, vendor payment plans, preparing short term cash flow budgets and working out new loan or lease terms with existing banks and leasing companies.

Factoring can be used if needed, but it is an expensive option with interest rates as high as 18%. Prioritizing vendors for payment and vendor payment plans are common. You should work with your vendors to make payments on old payables and stop the expensive and time consuming COD's. Pay old invoices first in order to stop the COD's as they can harm morale in the company and worry already nervous employees. A simple two week cash flow budget of expected incoming and outgoing cash can help make sure you have enough reserved for larger bills and payroll. This will help you know how much you have for other expenses and vendors.

In addition, banks and leasing companies are working with us and have shown some flexibility in extending terms or making interest only payments. Leasing companies have not been willing to do sale and leasebacks on equipment. We have been using private investors who are willing to purchase and leaseback equipment, freeing up some cash for the business and giving the investor collateral to protect their loan or lease.

If these moves do not result in sufficient cash flow, it may be necessary to explore options for a selling all or part of the company to a venture capital firm, private equity fund, strategic or private investor as described below. Again, some companies that want to give up limited or no equity are getting funded with mezzanine financing, convertible debentures and other forms of subordinated debt.

The first example below illustrates how a company raises cash for operations by selling part of the company. The second example highlights the complete sale of a distressed company to a investor.

Sell part of the company to raise cash -- We bring in a venture capital, private equity fund, strategic investor or a high net worth individual to buy a percentage of your company. The cash goes into the company giving you funds to grown and expand. Your company stays independent of the investor and you continue to run the business under your company name. You will earn a fair market salary plus continue to own part of the company. Any transaction between you and the investor will be at an arms length (i.e. help with financing, help in buying equipment, etc...).

Distressed sale of all of the company -- We bring in an investor that buys 100% of your business. The bank gets paid a percentage of the debt and your personal guarantees are removed. You are paid personally for the goodwill in the company (i.e. customer list, employees, company name).

Whether you choose the options above or pursue one of many other paths, running a company that is short of cash is extremely stressful on the owner and the employees. It is a terrible feeling to not know how you are going make the next payroll or pay vendors. This struggle also puts tremendous stress on the families of both the owner and the employees.

Relatively simple moves or some of the more complex examples like the ones outlined above can help you ensure that you survive this storm in order to reap the profits that historically follow. Whether you are distressed or just want to increase your cash position, please call Technology Capital and Merger, LLC at 1-866-603-4142 for a complimentary Business Capital Review to learn what options are best for you.