As a serial entrepreneur for many years, I’ve faced a wide variety of challenges in my companies, from sales, marketing and HR to partnership problems, leadership and strategic direction. They’re pretty much the same challenges I see today in my current role as an advisor to fast-growth companies. And it should come as no surprise that in both of my careers, the most prevalent and fundamental issue has been financing. Companies can’t address any of the other issues (or, at least, it’s pointless to) unless they have money, which is bad news — given the shortage of capital in Canada, especially for early-stage companies.
That’s why it pays to be educated in the myriad sources of capital that are available — if only barely — to your business. You’ve probably worked with banks, have raised money from friends and family, and know what angels and venture capitalists have to offer. One lesser known but potentially life-saving form of financing is asset-based lending. It’s an expensive and, some might say, risky way to raise money for your business. But some money is almost always better than no money — and I think asset-based lenders (ABLs) are a lot less scary than they seem.
Mainstream ABLs provide loans secured by fixed assets, accounts receivable and inventory. There’s a variety of players in this space, including leasing companies and factoring firms, which lend against invoices — a handy way to cover the gap between filling an order and getting paid for it. Chartered banks will even lend against assets, which often can be your home, a certificate of deposit or other marketable securities.
What does it cost? It depends on the lender, the quality of the asset you are providing as security and the competition in the market. Receivables from Triple-A credits can be factored for as little as a few points above prime, while securing against less dependable assets can result in interest rates of more than 20% per annum.
But what if you’re in need of short-term funding and you’re a square peg trying to fit into a round financing hole — as is so often the case with early-stage companies that lack a lot of tangible collateral? Although you’d be hard pressed to find a lender that operates in such situations and doesn’t kneecap its debtors in the event of default, they do exist. Instead of breaking your limbs, however, they’ll simply take your company. This is where asset-based lending get interesting — if not a little scary.
GC Global Capital Corp. (TSXV: GDE.A) is an uncommon if not unique breed of ABL in that it provides asset-backed bridge loans ranging from $300,000 to $3 million. (They’re called “bridge” loans because they fill the financing void till you acquire longer-term financing.) Its client list includes enterprises in oil and gas, mining, real estate, manufacturing, retail, financial services, technology and biotechnology.
Typically, GC Global’s loans are repaid in less than a year. It charges 1% per month, a structuring fee of between 1% and 2% of the loan and an equity component that can range from 5% to 20% of the value of the loan in the form of shares, warrants or options. As for security, I’ve seen GC Global secure its loans against mortgages on real estate, pledges of public- and private-company shares, R&D tax credit receivables and marketable securities. It usually asks for a personal guarantee from the principals of the borrowing company, such as their shares in the company itself.
Here’s an example of one of GC Global’s deals involving Montreal-based Revision Eyewear Inc., which had been given a substantial contract to supply ballistic eyewear to the Department of National Defence. Revision received a loan of $1.3 million for 10 months in exchange for interest at an annualized rate of 12.7% and 20% of the value of the loan in the form of share warrants exercisable for five years. Security came in the form of a general security agreement regarding the assets of the company and a pledge by the owner of his 51% stake in the business in the event of default.
If the risk of giving up your company to secure a loan seems terrifying at first blush, I think you can rest a little easier: lenders like GC Global are simply trying to ensure you have enough “skin in the game” to have your full attention and make you extremely reluctant to default. The last thing they want is to own your company or your house. They just want their money back.
On the other hand, these niche ABLs do hope to benefit from the equity kicker. Their goal is to see it appreciate significantly, then sell it for a nice gain rather than be a long-term shareholder. And if you think such equity demands are audacious, consider it flattering instead: they’re actually betting on your ability to enhance the value of the company. Besides, the balance of power rests with them: they have capital, you need capital and you’re unlikely to get it from anyone else. For many ambitious but undercapitalized entrepreneurs, asset-backed loans are not a bridge too far. They’re the only remaining road to a secure financial future.