Tiffany Charles, CFO of Medtech Solutions, was facing a tough challenge. Medtech, a venture-backed startup operating a business for just two years, needed test equipment vital that you its operations. While test products are broadly designed for most test applications, the tests to get conducted at Medtech needed custom-made equipment supplied by only one US manufacturer. Medtech had elevated sufficient investment finance to invest in nearly all its development and studies, nevertheless the custom-made equipment’s cost will require an unacceptably many Medtech’s research budget, restricting investments in other key areas. Tiffany explored manufacturer financing and contacted several leasing firms, but without results. Would Tiffany obtain the equipment that Medtech needed without requiring internal funds crucial for other projects?
Why custom-equipment financing is actually difficult to obtain
Potential financing sources approach demands with this particular type financing cautiously. Most financing for venture-backed startups involves a greater quantity of risk when compared with financing established companies. Financing sources that stretch credit to venture-backed startups understand accepting startup risks. These risks include financing businesses that are quite recent for his or her markets, that have negative earnings, which rely on investment finance sponsorship to stay afloat. Notwithstanding these risks, most financing sources are reluctant to battle the extra possibility of financing equipment that they are likely to be required to re-market eventually, however they aren’t able to maneuver. Many of them understand that a little % in the transactions they underwrite will not exercise, requiring those to repossess and re-marketing the apparatus to recoup as their investment as you can. Custom-equipment presents a massive challenge because it offers with no backstop should other exit channels fail.
Whether a venture-backed startup can buy financing for custom-equipment might depend on several factors:
How much money and percentage the gear represents in the total to get financed
Whether other assets might be offered as collateral to secure the transaction
The startup’s overall credit profile
Whether management can convince the financial loan company the products are vital that you operations and/or profitability
Whether an aftermarket exists and whether there’s any prospect of realizing value within the equipment if re-marketing is important
When the vendor offers equipment buy-back, trade-in, or re-marketing support, if preferred.
Just how can savvy startups overcome this financing challenge?
To boost the likelihood of obtaining financing, startups will need to take the following steps:
Stay with financing firms focusing on financing venture-backed startups. These companies understand venture risks and so are in the more powerful position to evaluate transactions involving custom-equipment.
Investigate after-industry for the apparatus by speaking for the vendor and looking out for used equipment brokers/dealers online. Frequently, the vendor can provide resale information and used equipment resellers might be spotted online via advertisements and postings. Be sure that you provide your re-marketing research for the financing firm.
Explore re-marketing assist with the vendor, including equipment buy-backs, trade-ins, or other vendor re-marketing plans. With regards to the vendor, customers could possibly lobby for special re-marketing plans just like a purchase incentive.
Consider other assets the startup might pledge to assist the transaction. The main concern in the financing source is getting the opportunity to exit the transaction when the startup default to make payments. By supplying additional collateral to assist the transaction, the startup could possibly alleviate or reduce this issue.
Make an effort to schedule custom-equipment purchases along with other equipment with a recognised aftermarket, so the custom-equipment represents a minority in the equipment being acquired. Similar to offering additional equipment as collateral, by bundling custom-equipment with readily re-marketable equipment, the overall collateral price of the bundle might be sufficient to assuage the financial lending provider’s concerns.
Highlight the critical nature in the equipment. If you should the startup’s profitability or operations and insufficient the equipment’s use would put the startup in the significantly weakened position, the options of obtaining financing is kind of improved. The reason is the financing source possess a relative advantage vis-à-vis other creditors in any company wind-lower because the equipment might be needed to restructure the business to be able to assist other creditors inside their recovery. Even though this is not just one reason behind financing custom-made equipment, it is a factor considered by most financing sources to make your choice.
In situation your startup needs financing for custom-made equipment, start using these tips and insights to navigate your quest.