Why Tech Companies Are Turning to True Sale Financing Solutions
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In the world of technology companies, securing the necessary capital for growth and innovation is a perpetual challenge. While various funding avenues exist, one option that's gaining traction and attention is True Sale Financing (TBF). In this article, we'll delve into why tech companies are turning to TBF and how it can unlock their business potential.
Understanding True Sale Financing
Before we explore the benefits of TBF, let's establish what it entails. A "true sale" is a financial and legal term that signifies the complete and irreversible transfer of asset ownership from one party (the seller) to another (the buyer). This transfer includes all associated risks and rewards, effectively insulating the asset from the seller's creditors or potential bankruptcy proceedings.
In the context of technology companies, these assets could encompass intellectual property, accounts receivables, annual contracts, or multi-year contracts. It's a concept that plays a crucial role in asset-backed securities, where underlying assets (like loans or mortgages) are sold to a special purpose vehicle, which then issues securities backed by the cash flows generated by these assets. The essence of a true sale is to ensure that these assets are entirely removed from the seller's balance sheet, safeguarding the securities from any claims by the seller's creditors.
The Key Characteristics of TBF
True Sale Based Financing (TBF) is an innovative approach to raising growth capital without incurring debt or diluting equity. While it shares similarities with Revenue-Based Financing (RBF), TBF for technology companies takes a unique route. It involves the purchase of specific contracts, irrespective of when the products or services are delivered, as long as they are non-cancellable. What sets TBF apart are its five key characteristics:
Improved Balance Sheet and Enhanced Cash Flows: TBF allows for the direct substitution of short-term illiquid assets on the balance sheet with immediate cash. The fast-forwarded cash flows from the future are recognized in the same quarter when the True Sale transaction occurs.
No Equity Dilution: Unlike traditional financing methods, TBF doesn't require the issuance of new shares, ensuring that existing shareholders maintain their ownership intact.
No Additional Liabilities: TBF doesn't add any new liabilities to the balance sheet, preserving the company's financial flexibility.
Lower Cost of Capital: TBF often comes with lower capital costs compared to alternative financing options. Providers perceive the assets they purchase as less risky due to the full transfer of future cash flows, protecting them from potential claims by the seller's creditors.
Flexibility in Payment Terms: Sellers under TBF aren't obligated to repay until customers fulfill their contract terms. This flexibility empowers companies to cherry-pick the contracts they want to sell based on cash flow needs and business strategies.
Comparing TBF with Other Financing Models
To grasp the significance of TBF, it's essential to compare it with traditional debt and Revenue-Based Financing (RBF). While traditional debt involves liabilities and dilution risks, RBF ties capital availability to a percentage of annual revenues. In contrast, TBF leverages cumulative projected gross cash flows from multi-year contracts, offering greater flexibility.
Advantages of True Sale over Traditional Loans
TBF boasts several advantages that make it an appealing choice for many companies:
Improved Balance Sheet: TBF enables the substitution of a portion of long-term contract payments, typically recorded as accounts receivable or long-term assets, with instant cash. This improves financial ratios, enhancing attractiveness to investors and lenders.
Flexible Repayment Terms: TBF transactions can be tailored with flexible repayment terms linked to specific contract payment schedules. This aligns repayment with cash receipts, improving cash flow management.
Access to Non-dilutive Capital: TBF allows companies to access funding without issuing new shares or diluting existing ownership. This is particularly valuable for companies seeking growth capital while avoiding equity dilution or facing regulatory constraints.
Lower Cost of Capital: TBF providers often offer capital at a lower cost compared to traditional lenders or equity investors. Their assumption of some risk associated with the borrower's revenue stream reduces the overall cost of capital for public companies, bolstering profitability.
TBF for ASX-Listed Companies
For ASX-listed companies operating under Appendix 4C mandates, TBF presents an opportunity to convert long-term contracts with staggered cash flows into instant cash. The accounting treatment for True Sale makes it possible to substantially boost short-term cash flows for the quarter in which the True Sale transaction is recorded.
Unlocking Business Potential with TBF
In conclusion, True Sale Financing offers a path for tech companies to secure growth capital without compromising equity or taking on debt. It enhances balance sheets, provides flexibility in choosing contracts to sell, and supports financial stability. However, it's essential to weigh the benefits against potential challenges, especially for larger tech firms. While TBF can fortify financial security, it may also impact competition dynamics.
If you're seeking a financing solution that empowers your tech company, consider True Sale Financing. To learn more about how Ratio Tech can help you harness the potential of TBF, schedule a meeting today.
In the world of technology companies, securing the necessary capital for growth and innovation is a perpetual challenge. While various funding avenues exist, one option that's gaining traction and attention is True Sale Financing (TBF). In this article, we'll delve into why tech companies are turning to TBF and how it can unlock their business…