Tiffany Charles, CFO of Medtech Solutions, was facing a hard challenge. Medtech, a venture-backed startup running a business for 2 years, needed test equipment important to its operations. While test devices are broadly readily available for most test applications, the tests to become conducted at Medtech needed custom-made equipment provided by just one US manufacturer. Medtech had elevated sufficient investment capital to finance the majority of its development and research projects, however the custom-made equipment’s cost will need an unacceptably large number of Medtech’s research budget, restricting investments in other key areas. Tiffany explored manufacturer financing and contacted several leasing firms, but with no success. Wouldso would Tiffany get the equipment that Medtech needed without needing internal funds crucial for other projects?
Why custom-equipment financing is really hard to obtain
Potential financing sources approach demands with this type financing very carefully. Most financing for venture-backed startups involves a higher amount of risk compared to financing established companies. Financing sources that stretch credit to venture-backed startups are familiar with accepting startup risks. These risks include financing firms that are relatively recent for their markets, which have negative income, which depend on investment capital sponsorship to remain afloat. Notwithstanding these risks, most financing sources are reluctant to defend myself against the additional chance of financing equipment that they’re going to be needed to re-market eventually, but they are not able to maneuver. Most of them realize that a small % from the transactions they underwrite won’t exercise, requiring these to repossess and re-marketing the gear to recuperate because their investment as you possibly can. Custom-equipment presents an enormous challenge for the reason that it provides without any backstop really should other exit channels fail.
Whether a venture-backed startup can acquire financing for custom-equipment might rely on several factors:
The amount of money and percentage the equipment represents from the total to become financed
Whether other assets could be offered as collateral to secure the transaction
The startup’s overall credit profile
Whether management can convince the financial lending company the devices are important to operations and/or profitability
Whether an aftermarket exists and whether there’s any prospect of realizing value in the equipment if re-marketing is essential
If the vendor offers equipment buy-back, trade-in, or re-marketing support, if preferred.
How can savvy startups overcome this financing challenge?
To enhance the chances of acquiring financing, startups must take the next steps:
Stick to financing firms specializing in financing venture-backed startups. These businesses understand venture risks and therefore are inside a stronger position to judge transactions involving custom-equipment.
Investigate the after-marketplace for the gear by speaking towards the vendor and searching for used equipment brokers/dealers online. Frequently, the seller can offer resale information and used equipment resellers could be spotted online via advertisements and postings. Make certain you provide your re-marketing research towards the financing firm.
Explore re-marketing help with the seller, including equipment buy-backs, trade-ins, or any other vendor re-marketing plans. With respect to the vendor, customers might be able to lobby for special re-marketing plans like a purchase incentive.
Consider other assets the startup might pledge to aid the transaction. The primary concern from the financing source is having the ability to exit the transaction if the startup default for making payments. By providing additional collateral to aid the transaction, the startup might be able to alleviate or help reduce this problem.
Attempt to schedule custom-equipment purchases as well as other equipment which has a recognised aftermarket, so that the custom-equipment represents a minority from the equipment being acquired. Much like offering additional equipment as collateral, by bundling custom-equipment with readily re-marketable equipment, the general collateral worth of the bundle may be sufficient to soothe the financing provider’s concerns.
Highlight the critical nature from the equipment. If it is advisable to the startup’s profitability or operations and lack of the equipment’s use would place the startup inside a considerably less strong position, the possibilities of acquiring financing is sort of improved. The explanation would be that the financing source have a relative advantage vis-à-vis other creditors in almost any company wind-lower since the equipment may be required to restructure the organization in order to assist other creditors within their recovery. Although this is not one reason for financing custom-made equipment, it’s a factor considered by most financing sources for making your final decision.