Leasing – A Key Component of Growth Company Financing Strategy
High-growth companies, especially ones that rely on high-cost venture or private equity for funding, have the preservation and strategic investment of capital as a top priority. Financing new ventures is a high risk proposition for investors and they seek relatively high returns, or costs of capital, in order to compensate for this risk. Accordingly, high-growth companies typically conserve their high-cost equity capital to fund growth and expansion plans, the hiring of key talent, acquisitions, and other key strategic initiatives. An effective strategy which can lower the company’s effective cost of capital is to fund working capital and fixed asset investments through other lower-cost sources of capital.

Working capital investment, either accounts receivable or inventories, can be financed with either conventional or venture banks utilizing asset-based lines of credit. These asset-based lines of credit represent a self-funding, low-cost source of capital to the growth company focused on preserving high-cost equity capital.

Likewise, most high-growth firms typically also require a significant initial and on-going investment in technology-related assets. These technology assets tend to have shorter useful lives and face high obsolescence factors, requiring the firm to constantly refresh the assets to maintain leading-edge performance. This is where leasing represents a very attractive source of capital for a variety of reasons.

First, leasing preserves credit lines for the growth company. Arranging technology equipment financing through leases allows the company’s bank credit to be maximized by allowing its lines of credit to be free to finance working capital.

Secondly, leasing removes trade-in value and residual value risk, particularly with regard to technology-related assets with high