Broadgate Corporate Finance Blog

Financing Equity

In dealing with my clients and their financing needs, I often have to approach the rough spot of financing equity. It seems that everyone wants to find some type of 100% loan to value financing for the next big internet start up. I hate to break the news to them, but it's not going to happen. Unless it is for some form of consumer lending, 100% financing is very hard to come by.

The reason is simply, lenders are not venture capitalists. In any financing proposal, there is always a certain percentage of the deal that is too risky for loss adverse bankers to finance. Usually this is around 20%. I, therefore, tell my clients point blank that 20% of their financing proposal will not be financed using commercial debt. 20% of the proposal is going to have to come from somewhere else.

This condition imposes several possibilities. First and most auspicious one is that the client already understands this fact and has 20% of their own money ready to go into the deal. The second possibility is that an investor can be lined up to cover the 20%. Finally, the financing proposal can be altered by either waiting for more time or asking for less capital. The take home message from this article is that whether you are financing a local hair shop, a new restaurant, or a $100 million land acquistion, you have to have the 20% down payment.

posted by Michael Anders @ 9:04 PM