ProntoForms needed capital to grow, but didn’t want to dilute existing shareholders by selling equity.
Based in Ottawa, the company is a leading provider of mobile forms services to more than 3,500 businesses around the world. ProntoForms delivers real-time data access, collection and sharing between field workers, office managers and executives.
With increasing sales and several strategic partnerships lined up, the firm opted for mezzanine financing in 2012 as a way of retaining ownership and flexibility to grow on its own terms, says chief financial officer Dave Croucher.
The new funding came from the Growth & Transition Capital group at the Business Development Bank of Canada. ProntoForms earmarked the financing for investment in sales and marketing in an effort to help grow its customer base and increase revenue. It has been recognized as a TSX Venture top 10 technology and life sciences company.
We did it our way
“We didn’t fit the classic profile for a bank loan because we had few tangible assets for collateral,” Mr. Croucher says. “On the other hand, we didn’t feel that the circumstances were right for an equity raise, considering the dilution that comes with it. Mezzanine financing was a great fit for our business model and took us to the next level.”
Mezzanine financing is unsecured debt that’s lent on the basis of a company’s track record, management strength and anticipated future cash flows. It’s more expensive than secured debt because it’s riskier.
However, Mr. Croucher believes it was the right choice for ProntoForms.
“We had the numbers to show how quickly we could pay back the money and knew we could create value several times over,” he says. “The funding was a seed that we could use to grow our revenue and pay back the loan within the allotted time. Mezzanine funding is good for a company with a clear vision of what value it can create and a track record of delivery. But you have to get your metrics right.”
Is mezzanine financing for you?
Mezzanine financing is an attractive alternative to equity, especially when a company lacks a fixed asset base, says Trevor Allibon, managing director at BDC Growth & Transition Capital in Ottawa.
“Most of our transactions are with technology and services companies that have a significant base of human capital,” he says. “Apart from a few laptops, their predominant assets walk into the office and leave at night. As one of the few Canadian banks to offer mezzanine financing, we look at companies past the startup phase, with good cash flow, a strong management team and proven market traction.”
Mr. Allibon advises companies considering mezzanine financing to answer a few basic questions:
– Is your strong financial performance sustainable?
– Is your customer base well-diversified?
– Where’s your market going? Could you be hit by a disruptive technology?
– Do you have a Plan B ready if things don’t play out as anticipated?
Dust off your elevator speech
Preparation is key to when applying for mezzanine financing.
“Be able to explain your value proposition concisely,” Mr. Allibon says. “Avoid the 40-slide presentation and get to the point of the problem that needs financing.
“Sometimes engineers find it difficult to explain complex software in simple terms, but with ProntoForms it was easy to understand what they were doing,” he adds. “They also had the financial statements and business metrics to back up their forecasts, as well as a well-defined strategy to create return on investment.”
– Special to OBJ