Capital Compass®

Your business today
* mandatory question
Debt: Most debt lenders depend on a company having a history of strong cash flow, and are encouraged when it has been around a long time. Start-ups don’t have a proven financial track record and often struggle to obtain debt financing. As an alternative, individuals with a strong credit score and significant assets may be able to obtain small personal loans (for example, a home equity line of credit)Royalty: Royalty investments typically don’t require collateral. Instead, investors depend heavily on strong earnings as their repayment source. Royalty investors seek companies that have proven themselves in the market and have a sales pipeline that can be evaluated. Start-ups are considered too risky.Equity: Many equity investors prefer working with start-ups, because rapid growth maximizes their profitability. Most businesses operate at a loss early on, before they find customers and become profitable. These losses are best covered by an equity injection from the owner or outside investors, because, unlike debt or royalty financing, equity financing does not require a customer to make a monthly payment.
Debt: The size of a loan is not an obstacle to a debt lender. It is possible to get loans as small as a few thousand dollars and as large as a few million dollars, depending on the size of your business.Royalty: Royalty investing is intensive, with average transaction costs ranging between $7,500 and $20,000. It is typically not cost-effective for a company to take on less than $100,000 in royalty financing because a significant portion of that amount will go toward transaction fees.Equity: Equity also comes with high initial transaction costs, so it may be cost-prohibitive to obtain equity financing of less than $10,000. Although equity can be difficult to obtain in the $10,000 to $100,000 range, it can be provided by a team of angel investors who each contribute small amounts.
Debt: Debt lenders prefer to finance the acquisition of business assets and/or real estate. These physical assets have defined resale values and provide lenders with a secondary form of repayment if a customer goes out of business.Debt lenders also look favorably upon growth capital and day-to-day working capital because these needs often indicate a company’s intent to expand, which might improve revenue and profits. While positive, lenders consider these types of loans slightly more risky than the hard assets mentioned above.Debt lenders consider past due or delinquent debts indications of cash flow problems, and look at them in a very negative light. Royalty: Royalty investors are typically interested in companies on the verge of moderate to significant revenue growth, so prefer companies looking for financing to purchase assets, access growth capital, or facilitate a merger/acquisition. Requests that are unlikely to support revenue growth, especially those that may be indicative of cash flow issues, tend to be looked upon negatively.Equity: Equity investors focus squarely on growth that leads to the sale of the company, as this is the source of their returns. Any capital request that does not accelerate revenue growth is looked upon unfavorably. And from an owner’s view, giving up a percentage of company ownership via equity financing is a costly way to acquire assets (real estate, equipment, etc) that could be obtained through debt financing.
Debt: Cash flow is a debt lenders’ primary repayment source, so they strongly prefer companies with long histories of stable earnings. Losses in recent years can make lenders nervous, even if current performance is strong. If a company’s profitability trend is negative, or if it has never been profitable, it will have a hard time getting traditional debt financing.Royalty: Royalty investors prefer to see a history of profits, but can also consider projections when making investing decisions. A royalty investor may be interested in a company that is currently unprofitable if the company can clearly show how it will be profitable soon.Equity: Equity investors focus on growth potential rather than profitability. Losses may not be seen as negative if they are incurred to grow the company and position it for a future sale. A company that was once profitable but is no longer can indicate the need for a turnaround expert rather than an equity investor.
Debt: In general, a higher gross profit margin (GPM) leads to a more-profitable company. This is attractive to capital providers of all types. A higher GPM often indicates a superior product or service for which customers willingly pay more. This suggests long-term stability, and a source of strong positive cash flow.Royalty: Royalty investors are particularly focused on GPM, as they are paid from a percentage of sales. Companies need a strong GPM to be able to repay the royalty investor while remaining profitable. A strong GPM indicates a superior “value-added” product or service, which suggests a company is ready to tap into new markets and/or win business away from competition. A weak GPM may indicate an overly competitive market, an inferior business model, or that a company offers nothing new or innovative.Equity: Equity investors require extremely high margins, which typically leads to a higher final selling price when the company is sold. They also feel that GPM indicates the uniqueness of the product or service.
Your business's future
* mandatory question
Debt: Debt lenders like to see revenue growth, because it is often is accompanied by improved profits and cash flow. They are wary of extreme growth however, as it can be very cash-intensive and ultimately put a strain on a company’s cash-flow position. Declining or negative revenues are even greater concerns, because they may indicate vulnerabilities within a company’s market or within the business itself.Royalty: Royalty investors are typically interested in companies on the verge of moderate-to-significant revenue growth, because they receive a percentage of revenue. Companies with negative revenues or low growth are unattractive.Equity: Equity investors rely solely upon a company’s growth prospects, and its eventual sale, for repayment. Successful equity investors need their investments to deliver enormous returns in exchange for the high level of risk they take on. They prefer companies that forecast high and extreme growth, and avoid those projecting negative to nominal growth.
Debt: Debt lenders prefer a company to have long-term contracts. This assures them that the company has a reliable revenue stream, making it a lower credit risk.Royalty: A company that can’t predict future orders may not attract a royalty investor. When a company operates in a market in which orders can’t be projected, it needs to demonstrate how it will keep its sales pipeline full.Equity: Equity investors are investing in both the management team and the company’s technology or innovative product. A company may have very little insight as to the exact timing of future orders, but this may not be a problem if equity investors are confident in both the company’s management team and the ability of the company to grow.
Debt: Debt lenders are primarily concerned with a company’s financial position. They may offer valuable advice, but don’t make managerial decisions. They appreciate a business owner who has outside support, but won’t base their loan decision on it.Royalty: Royalty investors prefer to be hands-on investors. They don’t make decisions for portfolio companies, but need to communicate frequently with owners. They succeed by assessing the risks in the business, and management team, and connecting them with resources to mitigate those risks.Equity: Equity investors take an ownership interest in the company, and require the same decision-making power of any business owner. This can include the ability to hire and fire staff (including you), make strategic decisions, take a seat on the Board of Directors, and take on additional capital. They need this level of control to maximize the company’s chances of success, especially when investing in high-risk, early-stage companies.
Debt: If the business will be sold in less than three years, some debt lenders may feel apprehensive about supplying long-term financing. They will need a very clear plan on how they will be paid in full under such a scenario.Royalty: Royalty Investors have the same apprehension, but to a lesser degree. If the company will be sold within a short time frame, the new owners will likely not want to continue the royalty agreement. So royalty investors need to know how they will be compensated for the fact that they will not participate in several years of revenue growth. This can be accomplished, but adds complexity.Equity: Equity investors strongly prefer to sell a company in less than five years. They will shy away from longer-term ownership that doesn’t promise a path to quickly recouping their capital.
Your business's market
* mandatory question
Debt: Debt lenders consider the level of competition within the market or industry in which the company operates. Typically, the greater the number of obstacles, or barriers to entry, the fewer competitors. Less competition makes a borrower less risky, because others aren’t trying to put it out of business.Royalty: Royalty investors’ interest in companies on the verge of growth makes competition a very important factor. They like to see numerous barriers to entering a company’s market or industry, so competitors won’t be nipping at its investment’s heels.Equity: Equity investors prefer high barriers to entry because if it is very expensive for a competitor to enter the market, someone wanting to enter the industry is more likely to buy an existing company rather than start their own. This increases the chance they can sell the company for a large profit.
Debt: Lack of competition makes debt lenders more comfortable. Competition may force companies to lower prices to hold onto market share. Lower prices, in turn, can strain a company’s margins and profitability.Royalty: High levels of competition concern royalty investors, because it can hamper a company’s growth. Their repayment comes from a percentage of revenue, so the lower the company’s revenues, the lower the return for the royalty investor.Equity: The marketplace in which a company competes is even more of a concern to Equity investors. Equity investors rely almost solely on a company’s growth trajectory. The less competition, the more quickly a company can grow. Also, being unique in the marketplace means a company will sell at a premium, an attractive factor for equity investors.
Owner's risk
* mandatory question
Debt: Most debt lenders require the personal guaranty of anyone who owns 20% of the company or more. Without a personal guarantee, most small businesses can’t get loans. Lenders may wonder why they should take a risk if the company owners aren’t willing to do so. Royalty: Royalty investors focus on the company’s earnings for repayment, but may also require personal guarantees. Not being willing to personally guarantee may indicate that the company owners aren’t confident in their future. Equity: Equity investors own a piece of the company, and rely solely upon a company’s growth prospects, and its eventual sale, for repayment. They typically don’t require personal guarantees.
Debt: Debt lenders consider personal credit history a good indicator of how a business may handle its loan obligations. They pull a credit bureau report as part of their due diligence, considering a strong personal credit report an indicator of low credit risk, and a weak credit report problematic.Royalty: Royalty investors examine personal credit and require personal guarantees. Strong or okay credit won’t necessarily strengthen the investment, but a low credit score could suggest that the borrower may mishandle business responsibilities.Equity: Equity investors typically do not examine personal credit, or require personal guarantees. They rely solely upon a company’s growth prospects, and its eventual sale, for repayment.
Debt: Most debt lenders require collateral as an assurance that a loan will be repaid even if a customer goes out of business. They view inventory and receivables as having some resale value, but less than equipment and real estate. Debt lenders consider real estate the most valuable collateral, as equipment may lose value over time, while real estate has the potential to gain value.Royalty: Royalty investors depend much less on collateral. They are willing to take more risk in exchange for a higher rate of return if the company is successful. This means a customer is not penalized as much for having no collateral to support a financing request.Equity: Equity investors typically don’t consider collateral. They rely solely upon a company’s growth prospects, and its eventual sale, for repayment.