A Mix-and-Match Money Menu
Banks give loans -- if you're lucky. Venture capitalists and public offerings provide cash for equity. But with private placements, business owners can choose from a much wider menu of financing options, mixing and matching debt and equity instruments, or combinations of both, to suit their circumstances.
Jai Bowers, a managing director of CMS Companies, a Philadelphia merchant-banking firm, describes some options, ranked according to the controllability of costs from a company owner's perspective:
1. Senior debt: The lowest-cost financing, usually provided by banks or insurance companies. These loans are generally secured, on a first-priority status, by a company's assets.
2. Subordinated debt: Has a higher interest rate than senior debt does, in exchange for slightly higher risks (since loans get paid only after senior debt is paid). Sometimes sold with stock warrants or other "sweeteners."
3. Subscription warrants: A form of security that can be converted into or exchanged for a company's stock.
4. Preferred stock: Stock that typically pays a dividend to its holder and usually includes more rights than common stock does (but in a bankruptcy situation is considered junior to all debt). Can be converted into common stock.
5. Common equity: Common stock of a company.* * *