Thursday, December 27, 2012

Golden Ticket: Precious Metals Can Fund Your Small Business

You have the ideas, the ambition, and the moxie all in place to get your small business up and running. The one deterrent keeping you from being your own boss is funding. Some are lucky enough to have family and friends who willingly invest their own money, while others have convinced a few venture capitalists to fund their project. But saving the old-fashioned way is the road most will have to take. Bank accounts and CDs are no longer an effective way to store fund because of the perpetually low interest rates set by the Federal Reserve. Precious metals are not only an excellent hedge against inflation, but can yield excellent gains as a result of the those same inflationary policies the central banks continue to embrace.

ETFs vs. Physical Metal

Americans tend to prefer investing in gold and silver exchange-traded funds, or ETFs, as opposed to the physical metals. ETFs are stocks traded on the market that are backed and valuated by the price of its respective commodity. In other words, you will own a piece of paper saying you have x-number of gold shares and y-number of silver shares. Owning the actual gold and silver gives you physical possession of your investment, which can even be used as collateral on a low-interest loan to startup your business. Gold and silver dealers, such as US Money Reserve, sell bullion in the form of coins and bars at real-time prices based on market fluctuations. This gold can then be stored either in a safe-deposit box or a fire-proof safe tucked neatly away in your home.

Saving With Gold and Silver

In 2003, the price of gold was about $300 an ounce, while silver sold for less than $4. Today gold hovers around the $1,700 per ounce mark, while silver is traded at $32 per ounce. In other words, had you deposited $2,000 into a savings account in 2003 with a 3 percent compound interest rate (this is being generous), your yield today would be about $2,650. Had that same $2,000 been used to buy seven, one-ounce gold coins in 2003, today you could sell them for almost $12,000. Many experts in the gold industry, including Euro-Pacific Capital, Inc. CEO Peter Schiff, are anticipating another spike in gold prices similar to that of the past decade. Gold and silver are excellent insurance policies and are guaranteed to retain their value.

Selling Your Metals

Investors in gold frequently watch the daily fluctuations in its price and decide whether to buy or sell. When you're ready to turn your gold coins into the cash needed to start your business, find a reputable dealer who buys bullion. They should offer you 90 percent of the current price of gold. The places to avoid are corner stores with large "We Buy Gold" signs and the loud television commercials encouraging you to send your bullion to them. Pawn shops are also places to avoid when selling.


Authored By: Madeleine Berry Still a consultant for hedge-fund investors, Madeleine believes that there are many other business endeavors that one can invest in, outside of military spending. She tells her clients to follow their heart and the money will follow.

Wednesday, December 12, 2012

Funding your Business Sources of Equity



Dave Archer
Let’s look at possible investors for your business.  The first two are within the reach of most businesses, while the latter two are options for a very specific - and small - group of businesses.  

Friends and family  

Friends and family are the low-hanging fruit of investors.  It may be easy to talk Mom and Dad, your siblings, etc., into investing in your business, and to do so with minimal paperwork.  If your business does not perform to plan, however, it's also easy to imagine the awkward discussions at the holidays when they ask about how your business - and their investment - is doing.

Crowdfunding

Crowdfunding looks to a large number of people - often strangers found via the Internet - to provide funding for your business.  Still in its infancy, two models of crowdfunding are evolving.  The first is reward-based, where people give you money in exchange for a gift or a product of some sort.  This model may also provide a way to estimate your potential market and perhaps pre-sell a large number of a new product. 

With the second model, people give you money in exchange for an ownership interest in your company.  Two caveats:  First, the Security and Exchange Commission is still setting the rules by which you can offer this type of equity. Second, each "owner," no matter how little they own, may feel entitled to your time via the phone or email.  You can imagine a worst-case scenario where you have a thousand "owners" vying for your attention.  Crowdfunding sites include www.kickstarter.com and www.crowdfundinglive.com

Angel Financing  

 "Angels" are individual investors who form investment clubs and look for LOCAL high-growth investment opportunities.  Given the need for high returns needed to offset the high risk of their investments, angels seldom invest in low-growth businesses such as retail or restaurants, but instead look for businesses likely to grow exponentially.  And, unlike the early days when angels invested in ideas, angel groups now look for businesses that are already generating significant revenue. Angels typically invest in the $100,000 to $1 or $2 million range.  For example, two groups in Northern Nevada that provide angel financing are the Reno Angels (www.RenoAngels.org) and the Sierra Angels (www.SierraAngels.com).

Venture Capital   

Venture Capital (VC) is the top of the equity food-chain, and is usually an investment fund pooled from sources of money such as high-net worth individuals, foundations, pension funds, etc.  VCs typically invest at least $1 million and look for established companies ready to take the next large step.  Like angel investors, VCs are looking for high-growth companies offering very high potential returns.  

Dave Archer is President and CEO of NCET - Nevada's Center for Entrepreneurship and Technology. Learn more about NCET at www.NCET.org

Monday, December 3, 2012

Investment Banking Blog Series – Capital Raise Process (Article 1 of 4) Types of Capital – Senior Debt & Mezzanine Capital


By: RKJ Partners, LLC (Cyril Jones & Gregory Ficklin)

As investment bankers, RKJ Partners possesses a breadth of knowledge and experience in advising clients that seek growth capital.  In our latest blog installment, we define and outline the key elements involved in the process of raising capital. 


It is fairly common for business owners to believe there are only three sources of capital – their local bank, the Small Business Administration (SBA) or personal loan/savings.  However, if certain business criteria are met, there are other viable sources of capital available to fund growth opportunities.  Capital is generally grouped into three main classifications:  Senior Debt, Mezzanine Capital and Equity Capital.  

Most entrepreneurs are very familiar with senior debt offered by traditional banks.  Senior debt is first in seniority and is often secured by collateral in the form of a lien.  Senior debt is financing that has been loaned to a company for a pre-negotiated period of time with interest paid on the principal.  Senior debt is among the safest form of financing for the party providing the funds.  Due to its inherent low risk, it also provides the least amount of return.  However, in exchange for this low return, significant protection is provided to the lender even in the event of bankruptcy.  

In this blog issue, we attempt to demystify a not-so-common type of capital – Mezzanine Capital (also called Mezzanine Debt).  

Mezzanine Capital/Mezzanine Debt - Overview 
In practice, most mezzanine financing takes the form of subordinated, unsecured debt. Initial discussions often focus on whether the debt should be structured in the form of loans or debt securities, with the investors’ view of the likely resale market being the strongest determinant. Mezzanine financings in the form of debt are commonly characterized by the inclusion of an equity participation, usually in the form of warrants, options and/or conversion features or co-investment rights associated with the primary mezzanine investment.
Maturity
The maturity of mezzanine debt is typically five years or longer, but the maturity for a particular issuance often depends on the scheduled maturities of other debt in a company’s capital structure. For mezzanine debt that is incurred at the same time as traditional bank debt, senior lenders often insist that the mezzanine debt mature later than their bank facility. However, because mezzanine capital tends to have a higher rate of return relative to other debt in the capital structure, some issuers prefer shorter maturities. Conversely, some issuers agree to longer maturities on their mezzanine debt in exchange for more flexible optional redemption terms.
Interest Rates 
Mezzanine debt instruments generally feature a cash coupon with a fixed rate, which can be payable semi-annually or quarterly. Mezzanine investors usually target a higher internal rate of return (“IRR”) on their investment than high-yield or bank loan investors, and seek to achieve their target IRR by a combination of the interest rate, fees and the equity component.  Mezzanine preferred equity investments are typically structured with a high fixed-rate dividend, which may be paid in cash or in-kind, and may feature an optional or mandatory conversion into common equity. 
Ranking in the Capital Structure
A key consideration in structuring a mezzanine financing is determining the position (technically referred to as being “senior” or “junior”) of the mezzanine debt in the issuer’s capital structure. In some situations, mezzanine investors agree to invest in a preferred equity instrument that is junior to all debt in the capital structure. For mezzanine investments structured as debt, senior lenders generally expect that the mezzanine debt is subordinated to the credit facility and possibly other senior lenders, such as high-yield bondholders. Therefore, mezzanine debt holders typically agree to be contractually subordinated or “junior” to existing and certain future holders of senior debt of the issuer. 
Security 
One of the defining characteristics of mezzanine debt is that it is typically unsecured. In those instances where mezzanine debt is issued on a senior basis at the same level with other debt of the issuer, the remaining senior debt is secured, so the mezzanine debt will be effectively subordinated to any secured debt of the issuer to the extent of the value of the collateral securing that senior debt. 

Covenants
Covenant packages used in mezzanine debt financings are usually based on high-yield style covenants or bank facility covenant packages.  If the issuer has an existing senior bank facility, or is entering into a new bank facility in connection with the mezzanine debt investment, the mezzanine debt covenant package may be largely based on the covenants in the credit facility.  Key negative covenants in mezzanine debt may include limitations on: incurrence of additional debt; restricted payments; liens; change of control transactions; asset sales.  
Equity Participation 
Mezzanine investors regularly seek to enhance their returns by negotiating for equity participation alongside their debt investments (sometimes referred to as an “equity kicker”).  Mezzanine equity investments can take various forms, including: 
  • Warrants or options to purchase a specified percentage of equity (often 1% to 5%) in the issuer. 
  • A right to co-invest in the issuer alongside the controlling stockholder or a private equity sponsor. 
  • A conversion feature that allows mezzanine investors to convert all or a portion of their principal investment into common equity of the issuer. 
Equity Component of Mezzanine Investment
Because the overall return to the mezzanine investor includes the investor’s ability to realize the value of its equity participation, a viable exit strategy is critical to the decision to participate in a mezzanine funding. Potentially viable exit events include: sale of the company/issuer; recapitalization; refinancing; or an initial public offering.
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RKJ Partners, LLC (www.rkjpartners.com):  Cyril Jones and Gregory Ficklin are Managing Partners with RKJ Partners, LLC.  RKJ is a minority-owned, Atlanta, GA based investment banking firm formed to assist lower middle market growth companies in execute transactions between $2MM and $75MM.  Specifically, RKJ provides buy-side and sell side M&A advisory services, capital raising services and strategic advisory services.