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Venture Leasing Works
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Generally, a major round of equity capital raised from credible investors or venture capitalists makes venture leasing viable for the early stage company. Lessors structure most transactions as master lease lines, permitting the lessee to draw down on the lines as needed throughout the year.
Lease lines usually range in size from as little as $ 200,000 to well over $ 5,000,000, depending on the lessee’s need and credit strength. Terms are typically between twenty four to forty eight months, payable monthly in advance. The lessee’s credit strength, the quality and useful life of the underlying equipment, and the lessor’s anticipated ability to re-market the equipment during the lease often dictate the initial lease term.
Although no lessor enters a leasing arrangement expecting to re-market the equipment prior to lease expiry, should the lessee’s business fail, the lessor must pursue this avenue of recovery to salvage the transaction. Most venture leases give lessees flexible end-of-lease options.
These options generally include the ability to buy the equipment, to renew the lease at fair market value or to return the equipment to the lessor. Many lessors limit the fair market value, which also benefits the lessee. Most leases require the lessee to shoulder the important equipment obligations such as maintenance, insurance and paying required equipment taxes.
Venture lessors target lessee prospects that have good promise and that are likely to fulfill their leases. Since most start-ups rely on future equity rounds to execute their business plans, lessors devote significant attention to credit review and due diligence evaluating the caliber of the investor group, the efficacy of the business plan and management’s background. A superior management team has usually demonstrated prior successes in the field in which the new venture is active.
Additionally, management’s expertise in the key business functions sales, marketing, R&D, production, engineering, finance is essential. Although there are many professional venture capitalists financing new ventures, there can be a significant difference in their abilities, staying power and resources. The better venture capitalists achieve excellent results and have direct experience with the type of companies being financed.
The best VCs have developed industry specialization and many have in-house specialists with direct operating experience within the industries covered. Also important to the venture lessor are the amount of capital VCs provide the start-up and the amount allocated to future funding rounds.
Satisfied that the business model is sound, the venture lessor’s greatest concern is whether the start-up has sufficient liquidity or cash on hand to support a significant portion of the lease term. If the venture fails to raise additional capital or runs out of cash, the lessor is not likely to collect further lease payments. To mitigate this risk, most experienced venture lessors pursue start-ups with at least nine months of cash or sufficient liquid assets to service a substantial portion of their leases.
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