E.-News Hamburg 05/11/17
Reuters notes that only U.S. bank lending is higher now than it was then. Lending is barely higher in Japan, steady in the euro zone and notably lower in Britain. Richard Swart, an expert of alternative finance at UC Berkley, notes that “high cost, high risk, and low reward of underwriting small loans makes small businesses unattractive to banks.” Anyhow, banks’ reluctance to lend makes it difficult for small businesses to access capital and that’s where stock capital markets come in.
Stock markets are a flexible capital raising option for companies. Fund raisers don’t have to worry about bankruptcy or interest payments and can sustain losses in order to grow. According to OECD,
“Growth requires investment and long-term investment requires patient capital. It is therefore essential that companies that have the potential to grasp commercial opportunities of scale and scope have access to equity capital.”
Equity financing is not only important because of flexibility; it also opens the door for further financing, secondary public offering for instance. Getting listed exposes a firm to the opportunity of financing future growth.
Equity financing might be more relevant for small companies as they are exposed to very high financial risk if they opt for debt financing. However, small companies might also find it difficult to get listed on major stock exchanges amid rigorous regulation. Therefore, over the counter markets might be the best option for small companies to go public.
How to access the U.S. financial capital market as a small cap firm?
There are several ways to access the market in the U.S ranging from securing a bank loan to getting listed on stock exchanges. Small firms don’t usually have the luxury to secure a loan as banks are reluctant to offer loans. Large exchanges are problematic because of the compliance regulation; smalls firms don’t have the skill or the resource to comply with regulation. Therefore, most of the small firms settle for angle investors or venture funds.
Regarding Angel Investors, the problem is they fail to provide a decent return to their investors. 80% of all angel investing association in the U.S. fail to provide return to their investors. Therefore, it’s quite difficult for small firms to find suitable angel investors. In case financing is secured, it’s isn’t as flexible as exchange equity and comes with limiting clauses. Venture funds aren’t so different.
“Taken as a whole, the returns from venture capital investments are low and unreliable, and many smaller venture capital firms ultimately fail.”
Choosing a good venture capital firm might be a cumbersome and cost intensive task for small growth firms. Overall, equity markets are among the safest choice for acquiring finance, however, financing largely depends on meeting the regulation and approaching the market in a right way. Therefore, it’s not a good idea for startups, or potential growth companies, to access equity markets without external help.
One of the efficient ways for small companies is to get listed on an OTC market using IPO, or going public, services of firms like GH Capital Inc. that specialize in small-cap IPOs. This reduces the workload of finding a good angel investor or a venture capital firm. This strategy also provides access to flexible equity financing.
Is IPO advisory the way to go?
It’s a good idea to use advisory services, especially for small companies, to go public. Small corporations don’t usually have the skill to carry out a complicated exercise like initial public offerings. If the companies do have expertise, they are engaged with their growth strategy, given the fact most small corporations emerge in growth sectors. Management can focus on operations instead of getting involved in taking the company public. Further, DIY is a double edged sword. It can negatively affect operations while also impacting the process of going public. Therefore, using an advisory service might be the right course of action as it can be cost effective and reduces the risk of poor execution.
Moreover, there are numerous benefits of using a one-stop IPO advisory service. Firstly, IPO candidates don’t have to use separate firm for several services, which leads to cost efficiency and limited administrative work. Further, IPO advisories usually agree to equity compensations, allowing small firms to preserve their cash in order to capitalize on the market growth. One of the advisory firms that can enable small cost effective IPO’s is GH Capital Inc.
Source:Focus Equity 2017|OTC Insights