The Great Balancing Act of Raising Growth Capital

Raising capital isn’t easy. Especially for new industries like digital media and ad-tech. Entertaining options requires a huge balancing act between so many factors like impact on cash flow, speed, price, flexibility, product type and owner liability. In this article we examine the 6 factors that you should assess when raising capital. These six factors are divided into two categories. First, there is the balance between economics and risk. This looks at price, flexibility and speed. The second category to balance is that of product type. This effects your cost of capital, access to other funds, and short-term cash flow. Either way you look at it, it’s important you assess all options.digital media receivables

Raising Capital: Balancing Economics With Risk

Balance #1 – Price and Personal Risk

Not all financing deals have personal risk to the owner or signatory on the deal. Generally speaking, the cheaper the cost of capital, the more personal risk is involved. The exception here is credit cards, where price is high and so is personal risk (i.e. credit score risk).

From the least expensive to the most expensive:

  • Lenders – the cheapest price, but lots of potential personal liability
  • Credit cards – no individual liability (except harm to credit score), 24-49% per year
  • Equity – no owner liability, but the cost is infinite (by selling equity, you give up future profits, in theory, forever)

Balance #2 – Price and Flexibility

Generally, the cheaper the price, the less flexibility. That’s why many investors are “hands off”. The trade for equity is cash, usually without any real strings attached (relative to a lender).

From the least flexible to the most flexible:

  • Lenders and Banks – numerous financial and non-financial covenants you must abide by (inflexible), for best pricing.
  • Credit cards – the only discretion you have is what to spend money on, but there is no changing terms with these companies.
  • Equity – you might never hear from your investor again (super flexible), but you have to pay them profits forever (expensive)

Balance #3 – Price and Speed

Another rule of thumb is that the faster you need or can access the funds, the more expensive it is.

Here is a list from the slowest to the fastest:

  • Lenders, banks and investors are the slowest (equity is an exception – it’s slow and expensive)
  • Credit cards – 1-2 week lag from approval to activated card; 3-18 months if bad credit score.
  • Spot cash market – immediate cash, for a 10-25% discount, depending on the term (usually less 3-9 months). This is what’s come to be known as the “merchant advance” market.

Raising Capital: Balance Between Product Types

Balance #4 – Short Term Impact on Cash Flow

With equity, you will have a one-time cash infusion and generally no payouts to investors for a long time. However with debt, payments begin right away, so you have to have the cash flow to finance repayments to the lender. Credit cards may result in a lifetime of payments given how quickly the interest compounds on them.

Balance #5 – Debt vs. Equity

This can become quite a complicated discussion, but think of it like this. Debt is short term and has more of an effect on cash flow. Equity is potentially far more expensive, if it ever gets realized, and in theory, you have to pay profits forever.

Balance #6 – Type of Debt Products

The possible combinations of debt products can be extremely complicated. That is what is referred to as blending products. One big concern is that people take out debt and pay for money they don’t need or use (i.e. you need $10,000 but the loan is for $25,000). Another concern is lag-time with getting funds, or personal liability to the owner.

OAREX is a Fast, Flexible, Debt- and Risk-Free Solution

OAREX offers an alternative to banks, lenders, credit cards and investors. By selling your invoices to us, we can provide you with immediate liquidity in exchange for the asset. Because we’re asset-centric, we are able to offer the market the most flexible solution available. Clients can list and sell their invoices for capital-on-demand, without personal or credit score risk. We are concerned with the credit of the company paying the invoice in 30-90 days, not a client’s personal credit history.

Here are the other benefits of OAREX

Offer offers a flat rate, fixed fee for the first 30 days, and then a fee for every 10 days until the invoice is paid to us. Learn more about how we price our deals.