Consider asset-based financing options

You have calculated that you need to raise $15 million in cash.

Here is an example of VSC’s financial model including the Bigland expansion, which shows that your cash borrowing requirement peaks at around $15 million in July 20X4.

VSC-Financial-Model-Including-Bigland

VSC will need access to most of this cash during 20X3 to fund the Bigland international expansion. Therefore, your Board of Directors would like you to fundraise the entire $15 million by 1 January 20X3.

You have six months to raise the cash and it is now time to think about the range of funding options available to you.

Given the stage of your business, your fundraising requirements are likely to be expensive in terms of equity dilution, arrangement fees and other financing costs such as interest rates.

Your starting point is to consider your asset-based financing options given that these are typically one of the cheapest sources of capital available.

Borrow against your offices

As a reminder, VSC fully owns its offices with a current market value of $5m. This provides a fantastic opportunity to borrow against your offices at a relatively cheaper finance rate.

You propose this to your Board of Directors and they agree to borrow $2.6m secured against this building at an annual interest rate of 6%. The bank agrees to lend you the money which will be received on 31 December 20X2, with the annual interest being payable in December each year. There are no capital repayments due within the first five years.

Borrow against your outstanding invoices

VSC currently has trade receivables of $500k, all of which are fully invoiced and due to be paid within the next 30 days. This unnecessarily ties up cash that could be used to fund your business.

You easily obtain approval from your Board of Directors to generate $0.4m by invoice discounting against your trade receivables balance at an annual interest rate of 4%. You will receive the cash on 31 December 20X2 and the annual interest is payable in December each year.

Overall impact

The overall impact of the above asset-based lending is to provide you with $3m of funding.

This is a great source of funding for the business and is relatively easy to obtain.