Raising capital without giving away equity.

Raising capital for your company at the current time can be difficult due to a whole range of global issues and many companies are finding that banks are refusing to lend. Other forms of investment may involve giving away equity in your company and this can be a bitter pill to swallow.

However there is another way to achieve this by utilising demand bank guarantees.

Market fundamentals

In the good old days market fundamentals where much easier to understand. For example, if interest rates went up then equities on the footsie 100 and 200 would fall.

Why? Because the cost of borrowing just went up affecting the bottom line of those companies who are currently a borrower from banks and other lending institutions.

Of course the opposite can be said if there is an interest rate reduction. Equities on the footsie 100 and 200 would rise and the bottom line of borrowing companies would be impacted in a positive way, as the cost of borrowing had been reduced.

Interest rates today

The 12-month sterling LIBOR is currently 0.23663%. Despite a projected increase by the Bank of England due to inflationary pressures for 2022 and 2023, this is still very cheap money compared to 20 years ago. Two month Euribor is currently negative at -0.483% and is predicted to stay negative into 2022.

If money is so cheap these days, why would companies need to raise funds by utilising a bank guarantee?

Raising capital by utilising bank guarantees

Despite money being so cheap, many companies are finding access to traditional financing exceptionally difficult.

During the Covid-19 pandemic the UK government guaranteed loans made by banks, thus making it easier for firms to access this traditional source of financing.

Today we are back to pre-pandemic lending and there are many struggling companies being denied access to traditional financing.

Therefore, companies unable to access this traditional financing will have to turn to Demand Bank Guarantees in order to raise finance. But what is a demand bank guarantee and how is it utilised to raise finance?

The demand bank guarantee

A Demand Bank Guarantee is issued by a bank on instructions received from their corporate client. A Demand Bank Guarantee can be used for a variety of purposes such as a customs guarantee, a tender guarantee or a performance guarantee to mention but a few.

A Demand Bank Guarantee can also be used to raise a loan or line of credit. However the most important point to remember is that the use of a Demand Bank Guarantee is governed by the verbiage contained in the format.

All Demand Bank Guarantees are governed by ICC Uniform Rules for Demand Bank Guarantees, (URDG 758). Basically, all banks adhere to these rules which is why lenders are happy to lend against a Demand Bank Guarantee.

So, what are the benefits for using a Demand Bank Guarantee to raise investment?

The benefits.

Despite the cost of becoming a beneficiary of a Demand Bank Guarantee the good news is that banks will lend against this financial instrument. As mentioned they are governed by ICC Uniform Rules for Demand Bank Guarantees, (URDG 758).

If the business plan contains, (which it must) a strong exit strategy, a bank may look at the project after one or two years and effectively buy out the Demand Bank Guarantee and organise a commercial loan. The company now has access to cheaper money by initially utilising a Demand Bank Guarantee.

Raising capital by utilising a Demand Bank Guarantee means that your company gets to keep 100% of the equity. This way they are protected from hostile takeovers and any external pressures being exerted on management.

Conclusion

If a company deems that by using a Demand Bank Guarantee the costs are very excessive, they must ask themselves one question. Do the costs outweigh the chance to get my project off the ground? If the “Exit Strategy” is strong, commercial funding may well be available within one to two years, therefore reducing the costs.

All in all, despite the availability of cheap money, if this finance is unavailable, for whatever reason, then on balance, the Demand Bank Guarantee route would appear to be the obvious answer.