Creative Capital
I ran into an entrepreneur that I know pretty well at a social gathering. As is often the case, the conversation turned to capital raising. It turns out that he has raised several hundred thousand dollars of "growth" capital through a loan from brokerage house. As I understand it the entrepreneur went to a number of wealth individuals and convinced them to open trading accounts at the brokerage house and use the securities in the account to collateralize/guarantee a loan to the entrepreneur’s company (in effect a margin loan with the proceeds being used to fund the business). In consideration of this loan, the company is doing two things: (1) it is paying the carrying cost (interest charged by the brokerage house) and (2) it issued some warrants to purchase common stock to the investors (the guarantors of the margin loan). As I understand it, the deal is that the loan will be repaid in one year. I also understand that the cost of capital is relatively low, although I don’t know all the numbers. Now, this particular company is really an execution play at this point in its life. It has real customers and now it needs to sell its product. It also has a robust pipeline of prospects. As a result, there is a credible basis for thinking that the carrying cost of the loan can be paid and that the loan can be paid in full in one year. Making this structure work for a pre-revenue company would take some changes, but it might be doable.
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