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How Venture Leasing Can Provide Vital Financing

Venture leasing is an innovative financing vehicle that allows venture capital-funded and start-up companies to finance equipment requirements without raising additional equity. It can offer major financial benefits as but also entails some risks.

The finance provider, or lessor, leases equipment to the start-up at a specified interest rate over a defined lease term. The lessor will also usually seek warrants on the company stock, which provides additional compensation to the lessor for the financing risk taken.

Venture leasing provides several major advantages. It enables the company to conserve vital cash through leasing equipment instead of purchasing it. Funds obtained from venture capital financing can be applied to meet other core business and operating expenses including critical research and marketing efforts. It can also remove the need to raise additional equity to finance equipment and infrastructure purchases, thereby avoiding dilution of ownership and control for existing shareholders.

It can provide financing at a time when the company is not eligible for traditional leasing or bank loans and is restricted from raising additional equity due to provisions in its existing venture capital agreement. Also, the venture lease is typically only secured on the leased collateral versus all the company’s assets.

Venture leasing can be structured to offer maximum financing flexibility. The company can offer a lower exercise price on the warrants to negotiate a reduced interest rate on the lease, or lower payments at the start, when cash flow is most constrained. Financing is not restricted to new asset purchases. Using a “sale and leaseback” agreement, a business can sell existing equipment, generate cash from the sale, and take out a lease on the same equipment.

If the terms of the lease meet certain accounting requirements, it may be structured as an “off-balance-sheet” transaction, where neither the leased asset or the associated debt obligation appear on the company’s balance sheet. This can improve financial ratios such as debt-to-equity and return-on-equity, which can, in turn, lead to a higher company valuation.

Companies best positioned to obtain venture lease financing are start-ups with a substantial cash position, who have committed venture capital backing, and can demonstrate quality management and good prospects for profitability.

The major risk of venture leasing is that the if the company generates insufficient cash flow it will default on the lease and lose the equipment. Also, if the transaction does not qualify for off-balance-sheet treatment, it can have a detrimental effect on financial ratios, lowering investor valuation. Whatever the accounting treatment, companies should be mindful that they are effectively increasing leverage, which can increase business risk. Eventual exercise of warrants also increases the risk of ownership dilution.

One of the most important assets of an early-stage business is cash. Management’s ability to effectively manage cash flow has a major impact on the survival and valuation of the business. For many companies, venture leasing may be the vital financing tool that means the difference between success and failure.

Article Source: http://www.articlemap.com

Writen by Peter Balsam To get tips on financing an aquisition or creating your start-up, visit us at www.lbo-advisers.com/ You will also find articles to stay up to date on venture capital, Angel financing, business plans and LBO.

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