E-Business 101, Part 4: Security Interests.com
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"Neither a borrower nor lender be." This is obviously advice debt lenders shun, and for good reason. E-tailers have a reputation for short lifespans, and even smaller promotional budgets. But if your business needs a financial boost, what can you expect a lender to look at? The devil, it seems, is in the details.
Introduction
Debt lenders look to cash flow, character of management and collateral when lending. The secured lender wants to understand, evaluate and secure the assets that collateralize the loan. Clients will look to their counsel for assistance in these transactions.
The basic formula is deceptively simple: Perfect the security interest in the assets. The "devil is in the details" of how. And the "devil in the details" is likely to be very present in the coming years. It is axiomatic that a growing economy with low loan defaults can mask a gross magnitude of lending mistakes, and that an increase in loan defaults will shine a spot light on every error and omission.
It is now estimated that approximately half of all on line "e-tailers" will be gone by the end of this year. It also is estimated that some will be consumed by others in consolidations while others will be end up in bankruptcy court.
With the cooling of the market for e-businesses comes the realization of the risks associated with equity financing. While many businesses have recognized that their equity investment in an e-business will be subordinate to the interests of secured and unsecured creditors, a good number may be just awaking to some of the other risks associated with equity interests. For example, that preferential payments to a creditor are subject to a ninety day look back in bankruptcy, while preferential payments to an equity holder are subject to a one year look back. Further, depending upon the nature of the relationship, some equity holders may find themselves defending against claims to pierce the corporate veil of the e-business in trouble.
These factors will converge to increase the pressure on investors to cast their positions as debt rather than equity. The authors expect debt to play a larger role in those businesses that survive the current shake-out.
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