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Non-traditional financing Instruments - Lexology

Most, if not all, startups and businesses face the difficulty of raising enough capital to finance their operations. The so-called "traditional debt financing", consists in obtaining resources through bank loans secured with mortgages on real estate assets (in its different modalities).

Possibly, it is the first option that comes to mind when searching for capital for your business activity. Leaving aside the benefits of traditional debt financing, the financial and credit situation of your business, as well as the lack of real estate assets, may cause that your business is not suitable for accessing traditional financing instruments or, in other words, may not be eligible for the reasons set out above. If your company is not eligible for traditional financing or has already been rejected, it is important to know that the regulatory framework of the Republic of Guatemala allows you to access other "non-traditional financing" instruments that will allow your company to obtain the resources you are looking for.

As a preliminary step before exploring various financing instruments, you need to deeply understand and know about your company's operations, financial situation, and nature of its assets, with the purpose of using these as a mechanism of attracting potential investors or lenders and gathering greater amounts of capital under better conditions.

  • Asset-based finance:

A. Debt secured by non-traditional assets:

Most small and medium-sized companies have several tangible and intangible assets, as well as rights over them, which can be used as collateral within a financing operation. Such assets and rights include trademarks, patents, software, licenses, inventory, accounts receivables, among others. Guatemalan regulations recognize and regulate the creation of movable securities over assets and rights of a diverse nature. By these means, you will be able to offer your lenders non-traditional but valuable assets (i.e.: software) as collateral. Similarly, Guatemala's legislation provides expedite and economic mechanisms for the creation and registration of these movable securities.

B. Factoring:

Time is a determining aspect in any economic activity. Account receivables with future maturity dates may not be relevant or valuable when your company needs immediately available resources. Despite this, accounts receivables can be used to generate immediate liquidity. Guatemalan law recognizes and regulates factoring agreements, through which your company may assign to a third party such receivables for the purpose of managing or collecting them, in exchange for immediate funds granted to your company.

C. Leasing:

Your company may need to purchase machinery, vehicles, furniture, technological or electronic equipment and other movable goods for its operation. Again, the lack of liquidity may be the main obstacle for acquiring such essential goods. But, there are different contractual alternatives that, within a leasing operation, will allow your company to obtain such goods without having to purchase and pay for them immediately. By means of a leasing operation your company may, through a third party who is responsible of acquiring and paying for the goods, benefit from them, in exchange of a consideration (monthly fee), with the option of acquiring the movable goods definitively or replacing them with new goods.

  • Venture capital investment:

Finally, it is important to remember that your company is your primary asset and source of value. The participation in your company and the profits it generates can be used as another instrument to raise capital. Offering participation in your company to investors in exchange for a cash contribution is another mechanism at your disposal to raise working capital. Guatemalan regulations allow your company to receive money from a certain number of investors in exchange for participation in your company, on the same terms and conditions as your company's other shareholders, or through the issuance of various shares classes (acciones preferentes) with limited voting rights and preemption right in the company's profits, as well as allow their repayment on special terms and that must be agreed in the company's bylaws at the time of their issuance issuance.

In any event, however, it should be noted that the Law of the Securities and Commodities Market imposes limits or conditions when it is pretended to obtain financing from investors, and for this purpose, it regulates the concepts of public offer and private offer that must be taken into account when this instrument is considered.

If your company needs to raise capital through non-traditional financing instruments, in Arias we have an experienced and multidisciplinary legal team that can help your company evaluate different non-traditional financing instruments, as well as advise you to prepare your company to participate and benefit from these instruments.

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Non-traditional financing Instruments - Lexology
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