24 Mar Are Equity Lines Coming Back?

The PIPEs Report last week tells us that equity lines of credit are making somewhat of a comeback. What are these? Kind of what they sound like – instead of a debt line, an investor agrees to give you money for stock anytime you want, up to a cap, but based on a discount to the stock’s trading price at the time you ask for the money. The stock they get can be traded immediately and they can get the discount back right away. Pretty sweet no? Company gets money when it needs and investor can make a quick return. And the article reports more equity lines in 2015 than any year since 2001.

There are some restrictions and up front fees that create some risk for the company. Plus when the stock goes down, the investor obviously gets more and dilutes existing holders more. But the company gets to decide when to let the investor “take down” stock, though when they need cash they do, and that’s too often when the stock is lower. The current wave seems to be an answer to semi-toxic convertible debt deals some smaller public companies are doing, with equity lines appearing more attractive to the balance sheet.

One key is getting the investor to agree not to short or help anyone else shorting the stock. And try where possible to keep the minimum fees and transaction expenses as manageable as possible. And check out your investor – talk to the last three CEOs they did lines for. There are solid and legitimate players in the space for sure, and I do believe equity lines have been misunderstood and unfairly vilified at times.