For many years, there has been a constant need for alternative financing to support the goals of entrepreneurs and emerging businesses. As financial journalist Matthew Moisan wrote in an article for Forbes, “it has become increasingly popular for early and seed-stage companies that are raising capital to do so outside of the traditional equity sale structure,” due to the difficulties associated with pricing, costs and time required.
Convertible Securities as Alternative Financing
Rather, convertible securities have taken center stage, especially “convertible notes and simple agreement for future equity (SAFE)”. For those unfamiliar with convertible securities, they are simple investments that “can be changed into another form,” such as a convertible bond changed into common stock. Convertible securities will typically pay a periodic fixed amount or preferred dividend and offer a price at which it will be turned into its alternative form.
Choosing Your Smartest Alternative Financing
With that in mind, it pays to know a bit more about the two most commonly used forms of alternative financing. The convertible notes rate as the most frequently used, and are just a form of debt. They convert (at a discount) into equity upon maturity, sale of a company or equity financing. They have interest rates of roughly 4-10% and a fixed maturity date. They usually have a valuation cap or a “discount” that allow them to convert to equity at a discount – “whichever would give the holder a lower per share conversion price”.
SAFE is similar to the convertible notes but has no interest and no maturity date. As that journalist noted, this financing ” tells investors that the company will take your money and you should hope that certain things happen at some point in the future.” Without the maturity date, and with no interest, this financing is very appealing.
Are you curious to know which sorts of alternative financing are right for you? If so, contact BizCap Commerical Finance online or by phone at 833-224-9227. Experts in flexible financing for any industry, they can help you uncover the best options.