Custom Equipment Financing
Potential sources of funding approach applications for this type of funding with caution. Most of the funding for start-ups supported by venture capital involves a high degree of risk compared to funding for companies with an established position in the market. The sources of funding from which venture supported start-ups are financed are used to accepting the risks associated with start-ups. This risk includes financing companies that are relatively new to their markets, that have negative cash flows and that rely on venture capital financing to stay in the market. Regardless of this risk, most sources of finance are reluctant to take the additional risk associated with financing equipment that may be needed to re-enter the market one day, but is unable to transfer. Many know that a small percentage of the transactions they sign will not materialise, which requires them to recover and re-market their equipment in order to recover as much of their investment as possible. Tailor-made equipment is a huge challenge, as in the event of failure of all other output channels, it offers virtually no backstop.
Whether or not a venture-backed startup can obtain financing for custom equipment can depend on several factors:
- Amount in dollars and percentage share of equipment in total financing
- Can other assets be offered as collateral for transactions?
- General starting point credit profile
- Can management convince the financing company that the equipment is critical to operational activity and/or profitability?
- Is there a secondary market and any prospect of realising the value of the equipment if it is necessary to re-market?
- Regardless of whether the vendor offers support for the purchase of equipment, trade or re-marketing, if desired.
- How do experienced startups cope with this financial challenge?
To improve the chances of obtaining financing, startups should take the following steps:
Stick to financing companies that specialize in financing startups supported by venture-backed. These companies understand the risks associated with the venture and are in a better position to evaluate transactions using bespoke equipment.
Aftermarket research for equipment by interviewing a dealer and looking for brokers/dealers of used equipment online. Often a reseller can provide information about the resale and used equipment resellers can be noticed online through advertising and posts. Make sure you provide your re-marketing research to finance your business.
Examine re-marketing assistance with the provider, including purchasing equipment, trading-in, or other re-marketing arrangements with the provider. Depending on the supplier, customers may be able to lobby for special re-marketing arrangements as an incentive to purchase.
Consider other assets that a startup may commit to supporting the transaction. The main problem with the source of financing is the ability to exit the transaction if the startup fails to make a payment. By offering additional security to support the transaction, the startup may be able to alleviate or significantly reduce this concern.
Try to plan your purchase of custom equipment together with other equipment that is well established in the aftermarket, so that custom equipment is a minority of the equipment you purchase. As in the case of offering additional equipment as collateral, by combining contract equipment with marketable equipment, the overall value of the collateralisation of the package may be sufficient to address the financier’s concerns.
The critical nature of the equipment should be underlined. If this is critical to viability or start-up operations and the loss of use of the equipment would put the start-up in a much weaker position, the prospect of obtaining financing is slightly better. The rationale is that the source of financing will have a relative advantage over other creditors in the event of liquidation, as the equipment may be needed to restructure the company or to help other creditors recover their claims. Although this is not the main reason for financing contracted equipment, it is a factor taken into account by most sources of financing in the final decision.
If your startup needs financing for custom-made equipment, use these tips and insights from tempest to navigate your search.