Question

Assume you are the CFO of a struggling company. While you do have a positive cash flow, it is minimal at best. If something does not change soon, the company will go under. Fortunately, your product development team has just created a new product that will not only save the company from financial demise but will also revolutionize how the industry does business. The problem is that the product is still 2 years away from being able to be sold to the public, and you will run out of cash within the next 6 months. How would you propose obtaining the funds needed to keep the company alive and thriving for the next 2 years until you are able to see a return on the product development? How would you keep the stakeholders happy?

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Answer 1

In this case the company needs cash support for another 1.5 years (i.e. 2 years – 6 months). The period of 1.5 years is a short period of time and as the CEO I think that the best two financing options in front of the company to tide over this temporary cash problem are:

• Make use of short term debt financing through banks or financial institutions
• Private equity funds

In the first option the company can obtain short term loans from its banks. It can enter into an arrangement with the bank asking for a re-payment moratorium for the next 1.5 years and that the loan repayment will start after a period of 1.5 years when cash inflow from the new product starts materializing.

The second option is the make use of private equity funds. In this case a private equity company will buy an equity stake in your company and this will provide you with an infusion of funds.

Considering the situation at hand the best option is to avail a short term loan from your bank. The loan can be repaid easily when the new product pulls up the cash flow position and it will not entail dilution of equity as well.