Warning - This Lease Might Explode Any Minute

Written by George A. Parker


Continued from page 1

Perhaps, one ofrepparttar best protections against getting stuck with service-related leased equipment is to thoroughly evaluaterepparttar 112202 service provider before proceeding. Make surerepparttar 112203 service provider is financially sound and has a long track record of providing excellent service. If possible, ask for and review financial information onrepparttar 112204 service provider. Do an Internet news search to make sure there are no troubling stories aboutrepparttar 112205 service provider. Be partial to services that offer equipment under contracts that tie service and use ofrepparttar 112206 equipment together, such that your obligation to pay is conditioned onrepparttar 112207 service being provided. Lastly, since these transactions always carry some risk, make sure that an abrupt interruption inrepparttar 112208 service will not have a material negative impact on your company or cause financial hardship.

George Parker is a Director and Executive Vice President of Leasing Technologies International, Inc. (“LTI”). Headquartered in Wilton, CT, LTI is a leasing firm specializing nationally in equipment financing programs for emerging growth and later-stage, venture capital backed companies. More information about LTI is available at: www.ltileasing.com.


Venture Leasing - A Smarter Way To Build Enterprise Value

Written by George A. Parker


Continued from page 1

After determining thatrepparttar management team and venture capital investors are qualified, venture lessors evaluaterepparttar 112201 start-up’s business model andrepparttar 112202 market potential ofrepparttar 112203 venture. Since most venture lessors are not technology specialists – able to assess products, technology, patents, business processes andrepparttar 112204 like - they rely greatly onrepparttar 112205 thorough due diligence of experienced venture capitalists. Butrepparttar 112206 experienced venture lessor does undertake an independent evaluation ofrepparttar 112207 business plan and conducts careful due diligence to understand its content. Here,repparttar 112208 lessor generally attempts to understand and concur withrepparttar 112209 business model. Questions to be answered include: Isrepparttar 112210 business model sensible? How large isrepparttar 112211 market forrepparttar 112212 prospect's services or products? Arerepparttar 112213 income projections realistic? Is pricing ofrepparttar 112214 product or service sensible? How much cash is on hand and how long will it last according torepparttar 112215 projections? When isrepparttar 112216 next equity round needed? Arerepparttar 112217 key people needed executerepparttar 112218 business plan in place? These and similar questions help determine whetherrepparttar 112219 business model is reasonable.

Satisfied thatrepparttar 112220 business model is sound,repparttar 112221 venture lessor’s greatest concern is whetherrepparttar 112222 start-up has sufficient liquidity or cash on hand to support a significant portion ofrepparttar 112223 lease term. Ifrepparttar 112224 venture fails to raise additional capital or runs out of cash,repparttar 112225 lessor is not likely to collect further lease payments. To mitigate this risk, most experienced venture lessors pursue start-ups with at least nine months of cash or sufficient liquid assets to service a substantial portion of their leases.

Gettingrepparttar 112226 Best Deal

What determines venture lease pricing and how does a prospective lessee getrepparttar 112227 best deal? First, make sure you are comfortable withrepparttar 112228 leasing company. This relationship is usually more important than transaction pricing. Withrepparttar 112229 rapid rise in venture leasing overrepparttar 112230 past decade, a handful of national leasing companies now specialize in venture leases. A good venture lessor has a lot of expertise in this market, is accustom to working with start-ups, and is prepared to help in difficult cash flow situations shouldrepparttar 112231 start-up stray from plan. Also,repparttar 112232 best venture lessors deliver other value-added services - such as assisting in equipment acquisitions at better prices, trading out existing equipment, finding additional venture capital sources, working capital lines, factoring, temporary CFOs, and introductions to potential strategic partners.

Oncerepparttar 112233 start-up finds a capable venture lessor, negotiating a fair and competitive lease isrepparttar 112234 next order of business. A number of factors determine venture lease pricing and terms. Important factors include: 1)repparttar 112235 perceived credit strength ofrepparttar 112236 lessee, 2) equipment quality, 3) market rates, and 4) competitive factors withinrepparttar 112237 venture leasing market. Sincerepparttar 112238 lease can be structured with several options, many of which influencerepparttar 112239 ultimate lease cost, start-ups should compare competing lease proposals. Lessors typically structured leases to yield 14% - 20%. By developing end-of-lease options to better accommodate lessees' needs, lessors can shift some of this pricing torepparttar 112240 lease’s back end inrepparttar 112241 form of a fair market value or fixed purchase or renewal option. It is not uncommon to see a three year lease structured to yield 9% - 11% annually duringrepparttar 112242 initial lease term. Thereafter,repparttar 112243 lessee can choose to returnrepparttar 112244 equipment, purchaserepparttar 112245 equipment for 10% - 15% of equipment cost or to renewrepparttar 112246 lease for an additional year. Ifrepparttar 112247 lease is renewed,repparttar 112248 lessor recovers an additional 10% - 15% of equipment cost. Ifrepparttar 112249 equipment is returned torepparttar 112250 lessor,repparttar 112251 start-up reduces its cost and limitsrepparttar 112252 amount paid underrepparttar 112253 lease. The lessor will then remarketrepparttar 112254 equipment to achieve its 14% - 20% yield target.

Another way that leasing companies can justify slashing lease payments is to incorporate warrants to purchase stock intorepparttar 112255 transaction. Warrants giverepparttar 112256 lessorrepparttar 112257 right to buy an agreed upon quantity of ownership shares at a share price predetermined byrepparttar 112258 parties. Under a venture lease with warrant pricing,repparttar 112259 lessor typically prices that lease several percentage points below a similar lease without warrants. The number of warrantsrepparttar 112260 start-up proffers is arrived at by dividing a portion ofrepparttar 112261 lease line - usually 3% to 15% ofrepparttar 112262 line - byrepparttar 112263 warrant strike price. The strike price is typicallyrepparttar 112264 share price ofrepparttar 112265 most recently completed equity round. Including a warrant option often encourages venture lessors to enter transactions with companies that are very early in development or whererepparttar 112266 equipment to be leased is of questionable quality or re-marketability.

Building a young company into an industry leader is in many ways similar to building a state-of-the art airplane or bridge. You needrepparttar 112267 right people, partners, ideas, materials and tools. Venture leasing is a useful tool forrepparttar 112268 savvy entrepreneur. When used properly, this financing tool can help early stage companies accelerate growth, squeezerepparttar 112269 most out of their venture capital and increase enterprise value between equity rounds. Why not preserve ownership for those really doingrepparttar 112270 heavy lifting?

George Parker is a Director and Executive Vice President of Leasing Technologies International, Inc. (“LTI”). Headquartered in Wilton, CT, LTI is a leasing firm specializing nationally in equipment financing programs for emerging growth and later-stage, venture capital backed companies. More information about LTI is available at: www.ltileasing.com.


    <Back to Page 1
 
ImproveHomeLife.com © 2005
Terms of Use