Venture leasing for rapid growth for startups is the ideal solution for equipment-heavy companies. That’s because hardware-based businesses tend to burn capital a lot faster than SaaS or software startups.
Statistics indicate that investors are increasingly becoming hesitant and cautious about funding new companies. Worldwide funding per month dropped by 63% in February 2023, reaching a low of $18B. This is the lowest figure since February 2022, and investments have never fallen below $20B.
Startups looking for funding need to look for other solutions, and venture leasing could be the answer. That’s because this funding helps overcome the barriers presented by the high interest rates for debt loans and venture capital.
Specialty leasing companies drive growth for startups by investing hundreds of millions of dollars. Savvy founders recognize the benefits of this form of funding that can help maximize enterprise value by providing economical funding.
Take a closer look at this fast-upcoming form of equipment financing for startups with backing from venture capitalists. These VCs could be institutional or corporate venture funds. You’ll understand how to unleash the power of venture leasing for rapid growth for startups.
The Ultimate Guide To Pitch Decks
Understanding What is Venture Leasing
Venture leasing is a term describing the process of leasing equipment to startups. Such companies earn revenues but have yet to generate profits. They may also have negative cash flows and must rely on subsequent equity funding rounds to stay operational.
Using the venture leasing option, founders can acquire the operating equipment they need and divert the venture capital elsewhere. This equipment can include laboratory supplies, machines, and testing gear for pharma sectors and computers and hardware for tech companies.
Furniture and other manufacturing and production hardware are basic for all business verticals. Any other gadgets needed to automate the unit can also be leased using this capital. Leasing companies may offer securitized and aggregated equipment as part of a single bundle that is more economical.
Venture leasing is also a form of service where leasing companies provide assets to the startup for a fixed term. In return, the startup makes payment to the lessor, which makes the lease a form of debt. For this reason, lessors typically prefer to provide equipment only to stable startups.
Equipment owners need assurance that the startups have the capability to make lease payments regularly–preferably out of their cash flows.
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How Venture Leasing Works
Early-stage companies that have raised a significant amount of funding from their latest round are good candidates for venture leasing. Leasing companies may structure their transactions similarly to lines of credit.
The typical lease line ranges from as low as $200,000 to above $5,000,000. As for the lease terms, they could be anywhere from 24 to 48 months, with repayments due every month. Usually, payments are made in advance. Added lease terms rely on several factors, such as:
- Leasing startup’s creditworthiness
- Quality and useful life of the equipment
- Lessor’s expected ability to remarket the equipment in case the startup fails and they need to recover their costs, especially when lessees customize the equipment for their units
- Amount of capital raised from VCs
- Anticipated funding from future funding rounds
- Market rates and competing leasing companies and the terms they offer
Startups leasing equipment have the option to purchase the equipment outright when they have the funds. They can also return the equipment or renew the lease at a fair market value. Terms like these add flexibility to the end-of-lease conditions while enabling startups to negotiate for lower pricing.
Startups acquiring the equipment are responsible for maintenance costs, buying insurance coverage and paying premiums, and covering taxation dues. Since these businesses rely on future equity funds to stay operational, leasing companies will vet them carefully.
Venture Leasing Companies’ Due Diligence
The venture’s credit standing and the caliber of the investors backing it are factors that feature in its due diligence. That’s because lessors want information about the venture capitalists’ resources and staying power. Or the time frame for which they will continue to support the investment. They’ll also look into the startups the VCs have funded previously and if they have achieved great results.
The leasing company’s due diligence procedures are no less meticulous than venture capitalists. Expect to present information about your core business functions like marketing, engineering, sales, research and development, production, and finance. The efficacy of the business plan, the core team that has demonstrated success, and efficient management are other criteria for approvals.
Other screening criteria include the startup’s business model and market presence. Typically, lessors may not have the expertise to evaluate the company’s products, technology, patents, and production processes. This is why they prefer to rely on VCs to vet the startup before they lease equipment.
If you have the backing of VCs that have industry-specific expertise with in-house consultants, getting approvals is easier. However, the lessor may also examine the experience the VC teams have with the verticals in which they operate. Whether or not the VC will offer further funding is also a criterion.
Leasing Companies Need Payment Assurance
While lessors are at it, they will also examine the projected market for the products and services and pricing structures. Cash flow projections, the cash flow in hand, the runway, and the time interval before the startup will need a fresh infusion of capital are also considerations.
With these criteria out of the way, the leasing company will check for the liquidity the startup has to make payments. At least for a significant part of the lease term. The lessor must assume the risk that the startup is unable to raise further funding or faces cash flow snags.
Since collecting payments can quickly become a problem, leasing companies approve startups that demonstrate minimum cash flows. For instance, nine months of cash or liquid assets can cover a large portion of the lease payments.
Alternatively, the leasing company may also require equity as additional cover for the risk. Warrant coverage gives lessors to purchase company stock at a pre-determined price at a later date.
This provision gives them additional protection for the risk they are taking when supplying equipment to a startup. Especially a company that has yet to generate profits. That’s how venture leasing for rapid growth for startups is a great option.
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What Kind of Startups Qualify for Venture Leasing
Venture leasing is suitable for startups between two and four years old. They have a Minimum Viable Product and a ready customer base. Founders who are looking to infuse flexibility into their financing and free up working capital for operations consider this option.
Such startups are typically early-stage and have not yet built a robust credit profile. That’s why the due diligence processes are distinct from venture capitalists. A critical benefit to acquiring venture leasing is that founders can prevent diluting their ownership.
This advantage is of particular concern for stakeholders like founders, investors, and management teams that have stock options. Startups can also extend their working capital and, perhaps, hold off on raising further funding rounds.
Essentially, an asset-heavy company becomes asset-light, which is preferable for investors. Venture leasing for rapid growth for startups is a viable option when founders have two options. They can approach existing VCs for more capital or reach out to new investors, a process that is typically time-consuming.
How Venture Leasing for Rapid Growth for Startups Works – Advantages
Venture leasing has several advantages for startups.
- When startups take on venture debt, they offer investors lein on the company and its assets as a whole. As a result, the startup also risks its Intellectual Property and intangible assets. With venture leasing, the only risk is on the equipment the lessor has provided. In case of a default, the startup only stands to lose specific equipment.
- Venture leasing is also a form of “just in time financing.” That’s because founders can choose to take the equipment on lease for a particular time when they absolutely need it. This factor allows them to stay lean, save on costs, and infuse operational efficiency into their workflows.
- Venture debt involves offering unsecured loans as against venture leasing, where the leased equipment is collateral.
- Founders need not lock valuable equity into assets. Instead, they can conserve the capital and divert it toward growing the company quickly.
This form of funding is suitable for asset-heavy business verticals that must make a substantial investment in physical assets. For instance, tech companies need computers and hardware for operating, which they can lease instead of purchasing.
- Venture leasing ensures a higher degree of flexibility and control since founders can choose to purchase equipment or renew leases. In this way, they can delay equipment costs until the time after the lease transaction expires. That’s how you can higher enterprise value during the initial term of the lease.
- Founders can demonstrate higher earnings, which assists in more robust valuations that can, in turn, help in attracting funding.
Venture leasing eliminates the need for lien, collateral, and covenants, as in the case of loans from conventional banks.
Disadvantages of Venture Leasing
While venture leasing has upsides for entrepreneurs, they should also be prepared for the downsides.
- Venture leasing companies typically provide standardized tools and equipment suitable for units across the board. They may not permit customization since they will want to lease the equipment to other clients. That is, if the startup cannot keep up with payments.
- Some hardware-based or specialist startups may need specific equipment that works with the Intellectual Property they’ve developed. Venture leasing might not be the right choice for them.
- Leasing equipment is essentially a temporary solution or a stop-gap arrangement. The goal here is to deploy available capital to generate maximum returns without locking it into fixed assets. Startups need to have the open option to purchase the equipment when they have the funds available.
- Leasing equipment can work out to be far more expensive than purchasing it outright in the long run. Founders need to be aware that the lessor is also looking to make profits from the transaction.
Are you ready to explore the different sources of funding? Check out this video, where I have explained the best sources to look for.
Venture Capitalist Funding vs. Venture Leasing
Venture leasing is much more economical than venture capital, which involves the startup ceding some portion of its equity permanently. This percentage can range from 35% to 50% on the VC unsecured, non-amortizing equity capital.
Further, VCs require board seats and a specific time frame for exiting the investment. As a result, they may push the startup toward early IPOs. On the other hand, venture lessors expect 14% to 20% returns from their investment that lasts two to four years.
Founders should consider using a combination of venture capital and venture leasing for rapid growth for startups. You’ll lower the venture’s capital cost, preserve ownership by avoiding dilution, and build enterprise value quickly.
How to Choose the Best Venture Leasing Company
Just as leasing companies do their due diligence before selecting startups, founders should also do their part. You’ll scout around the market to look for national leasing companies specializing in equipment for your business vertical.
Venture leasing for rapid growth for startups works best when you partner with a company that has exceptional expertise with startups. Work with a lessor flexible with cash flow issues and offers some leeway when it comes to delayed payments.
You’ll also look for providers of value-added services that may include acquiring equipment at a better price. Or the option of trading out equipment for upgraded versions. Some lessors may also offer you perks like working capital lines, advice from financial consultants, and factoring.
Partnering with a great leasing company can also open up doors for venture capital sources and other strategic partners. You can deploy all these perks of venture leasing for rapid growth for startups.
As the founder of an upcoming startup with an industry-disruptive concept, don’t overlook the option of venture leasing. When used effectively, it can prove to be a valuable enterprise-building financing option.
Ideal for early-stage startups, venture leasing can help accelerate growth by helping you conserve capital and avoid dilution.
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