A venture capital backed mid-stage communications company needed an equipment loan to finance new
equipment acquisitions and to refinance existing debt to allow for more financial flexibility. This case study illustrates the benefits of using a direct lending source as opposed to the possible pitfalls of utilizing a broker for debt financing.
Stage: Pre-Profit Mid-Stage
Investors: Over $30MM from top tier VCs
Debt Advisors Group (DAG) was engaged by this client halfway through its lender selection process. As earlier noted, the client had in place an equipment loan from a bank, which required them to maintain all their operating and investment accounts with that institution. This requirement, along with the “right to offset” triggered by restrictive covenants, severely limited their future financial flexibility. In essence, they were borrowing their own money. This structure provided no additional runway or leverage on their expensive equity capital. By the time DAG was hired, the company had already obtained several proposals from brokers as well as a new proposal from the bank that provided the first equipment loan. DAG discourages using brokers because of the “bait and switch” tactics that some employ. Brokers may be unable to deliver deals with terms similar to those spelled out in their term sheets.
The chief financial officer’s explicit goals for the new round of financing were:
- Maximize future financial flexibility: Complete an equipment-backed structure with no additional collateral requirements and no financial covenants.
- Minimize warrant coverage: Negotiate warrant coverage to limit equity kickers due to the expressed wishes of the client’s board of directors.
- Reduce overall cost: Find lowest IRR alternative.