Bitcoin Forum

Tangible Cryptography LLC seeks Line of Credit to expand working capital

Background:
TangibleCryptography LLC has operated the FastCash4Bitcoin service for over 90 days.  During that time it transitioned from a manual service to provide faster Dwolla withdrawals for a certain exchange to an independent sales portal which offers same day payouts on bitcoin sales.   Over the last month we have seen a significant increase in volume.  Our customer feedback continues to be spotless with no unresolved issues and we have not had any sales where funds weren’t disbursed within twenty four hours.  Despite increasing our fees (to dampen volume without dampening free cashflow) and offering “direct sales” (which have a faster turnaround on capital) we routinely run into situations where we lack available funds and must halt new sales.  We never "float" sales.  If we buy a clients coins it is because we can pay them.  The traditional banking network is horribly slow and variable especially when used for funding bitcoin sales which by comparison are instantaneous.   As our operation is continually USD limited we need an increase in working capital to expand to larger volumes.

Operation:
We purchase bitcoins from clients using our FastCash4Bitcoins service.  These purchases are made at a discount to the MtGox last price which we designate the "margin". Our margin varies depending on current volatility, the difference between the MtGox last and the bid on other exchanges, and our currently available funds.   Over the last 30 days our margin has volume weighted average of 3.62% and floated between 2.87% and 4.13%.  We disburse the proceeds of the sale to our clients via the method of their choice.  The acquired coins are then sold on a multiple exchanges or by “direct sales” to large bitcoin buyers.  Our “direct sales” program is an attempt to shorten the USD -> BTC -> USD timespan.  Direct sales volume has grown significantly since we introduced it a month ago and now represents roughly 35% of our sales volume.  We also acquire bitcoins from our CellCoin service but so far this property has been underdeveloped.  The revenue and capital requirements for that venture negligible compared to FastCash4Bitcoins.  

Purpose & Scope:
The purpose of the loans is to expand our working capital, reduce the occurrences where we exhausted available funds, and allow the company to handle higher sales volume.  We are seeking two lines of credit.  Both would be open ended (no fixed maturity) with periodic interest only payments.  We feel that the best option would be to make both notes callable by either party with 30 days’ notice.  If that doesn’t meet the needs of lenders other loan structures can be considered.

Line of Credit A
Amount: 500 BTC (Funded)
Denomination:  Bitcoins
Interest:  0.5% per week
This will allow us to eliminate the need for the company to hold Bitcoins.  The Line of Credit will remain in bitcoin form and allow us to instantly sell acquired coins.  We currently hold 500 to 1000 BTC for this purpose and this LoC will allow us to sell our bitcoin capital and increase our fiat working capital.  
On edit: reducing request to 500 BTC as it seems likely both lines will be funded.  500 BTC has been funded.

Line of Credit B
Amount: $20,000 USD (Funded)
Denomination:  USD
Interest:  1% per week
While bitcoins will be used to fund, make interest payments, and repay the line of credit the note and any resulting obligation will be denominated in USD.  We will promptly sell the proceeds of this line of credit and use it to increase our working capital.   Lenders should consider that they will not be long BTC.  This note may be attractive to lenders who wish to short bitcoin, wish to acquire bitcoins over an extended period of time, or wish to balance other bitcoin denominated investments.
On edit: Funded


Lender risks and mitigation:

Risk: hacking or other bitcoin loss resulting in inability to repay.  Our company uses encrypted cold wallet which are kept offline.  Encrypted backups are maintained as well as encrypted dump of private keys (failsafe recovery in event of flaw in wallet format).  All of our exchange accounts employ strong passwords and two factor authentication.  Our working bitcoins are spread out across the cold wallet and exchange accounts minimizing the number of coins that would be affected by any breech.  Our bank accounts and PayPal account are also protected by two factor authentication.

Risk: closure of account or freezing of funds by Dwolla or PayPal. We keep no more than 10% of our working capital in accounts on either provider.  We accept no PayPal or Dwolla transactions from customers which means we have no risk of chargeback or disputes that could result in account closure.  We have provided information to Dwolla compliance department on our business procedures however they have not as of yet certified us as an approved digital currency merchant.  The PayPal account is a corporate account and we pay a fee to PayPal for every payment sent.  We don’t use “gift” or “personal” payments.  The Dwolla and PayPal payment options while popular (in terms of number of sales) tend to have smaller payouts and as such they each represent roughly 12% of sales volume (in USD).  While a freeze on one of these accounts would result in a reduction in working capital the company could continue to operate as is with remaining capital reserves.

Risk: lendee has no intention on repaying.  While this is a risk in any loan Tangible Cryptography LLC is registered with the Virginia Corporation commission.  “DeathAndTaxes” (real name and identity will be shared with lenders) is also willing to sign a guarantee for the debt incurred by Tangible Cryptography LLC.   I have a 702 FICO score with no derogatory information (no lates, missing payments, bankruptcies, collections, etc).  Supporting docs for both the company and guarantor will be made available (within reason, please provide specifics on documentation needed).  

Note:   Tangible Cryptography LLC has three members however the debt will NOT be guaranteed by the other two members.  The loan will be to Tangible Cryptography LLC and will be personally guaranteed by “DeathAndTaxes” in the event Tangible Cryptography LLC defaults.  This condition is not negotiable.  My two partners are unwilling to guarantee the loan as they are not as comfortable with this type of alternative financing.

Have had talks with some potential lenders via PM, email and phone calls.   Here are some common questions which might assist other potential lenders.


Asked and answered questions:

Are looking for an equity partner?  Is this in any way an equity stake?  Is there any other debt?  Is this debt senior?
The company has no other debt.  This is a debt only offering.  The note grants the lender no equity stake nor the option to gain an equity stake.   At this point we have no intention on offering an equity stake


You use the term LoC.  Will the amount borrowed vary?
LoC was a bad choice of words.  The amount borrowed and other terms are fixed.  There is no maturity date.  Payments are interest only (probably weekly but that is negotiable w/ lender). Either party can terminate the note by providing 30 days notice.  Full principal plus one final interest payment will be paid when the note terminates.  


Why are there two amounts for LoC B ($10K to $20K)?
We are seeking $20K USD however will consider a loan (by one lender or multiple lenders) of at least $10K.  If we don't receive offers for at least $10K we will not be using this option.   Borrowing less than $10K will not materially change our working capital so it doesn't make sense.


Pirate offers 7% a week why should I accept 0.5% to 1.0%?
We offered the notes at rates which are viable for our business.  There is no value in debt for debt's sake and we have no use for funds at 3,400% APR.  Even lenders which may higher yielding loans may find this "low" interest loan useful in their portfolio.  We are pretty firm on these rates.  The company is profitable and growing, and if we can't get funding at rates that make sense we will grow the company organically.  It will mean slower growth and more liquidity concerns over the next couple months but it doesn't make sense to borrow at a rate where the loan is more of a liability than an asset.


What happens in LoC B if the bitcoin exchange rate rises?
LocB is denominated in USD.  Bitcoin is only used a fund transfer mechanism.  The amount owed and the interest generated will be in USD.  Yes this means if the exchange rate rises higher than the rate of interest you will "lose" relative to just being long BTC.  On the other hand if the exchange rate falls you will come out ahead plus gain the weekly interest.


Will you open your books?
Well it depends on how much detail you are looking for.  If you want a copy of our transaction db, and quickbooks file that isn't going to happen.  A balance statement and income statement for the prior month is available (with NDA).   For lenders unwilling to sign a non disclosure agreement we can provide partially redacted bank statement for the prior month.


Can I talk with you over the phone?
The "you" will be "DeathAndTaxes".  Send a PM to this or DeathAndTaxes' forum profile for a phone number.  Serious inquires only please.  


Are you drawing a salary/dividend/compensation from the company?  Do you need funding to survive?  Are you relying on this venture?
No.  None of the owners are drawing any compensation from the company.  We all have full time regular jobs.  This is a speculative venture and we don't intend to use profits for anything other than expanding/improving the balance sheet for some time.   We have one part time employee who handles order processing and office duties.  The wages paid are minimal relative to the free cashflow.


Is this a Member Managed or Manager Managed LLC?
Wow someone who knows LLCs.   Tangible Cryptography LLC is Manager Managed and the operating agreement allows for multiple managers.  Currently DeathAndTaxes is the only Manager.  Non-managing members have no direct authority in the day to day operation of the company.  The operating agreement requires member vote only in significant events.


What happens if you "fail"?
Thanks for the vote of confidence.   We don't anticipate a scenario where the company would fail spectacularly (Bitcoinica, yeah I know you were thinking about it).  The combination of cold wallets, two factor authentication, having funds spread over various trading and financial accounts means that a single spectacular event which simultaneously results in the loss of all capital is highly implausible.   What is more likely is we never grow this venture to a level where it is worth the cost, time, and risk.   If that happens we will close up shop, repay creditors, dissolve the LLC and each partner will get their equity stake.   Any profit or loss goes to the partners only after liabilities are satisfied.    If you are still worried, "DeathAndTaxes" has offered to ask as a guarantor for the loan.  Any debt delinquent by the company will be repaid by him.   Having the debt in the name of the LLC provides you the additional protection that the death of "DeathAndTaxes" (now that is ironic) doesn't change the obligation of the company.

D&T personal note:  Given the nature of our business I have no worries about acting as guarantor.   There is no likely risk which would prevent the company from being able to repay the loan.  It is callable on short notice, it is "small" relative to our working capital, and we have no large CapEx obligations.   Even an event like Dwolla freezing funds, our MtGox account being hacked, or Bitcoin value falling 99% wouldn't prevent the company from repaying the loan.  It IS possible this venture will fail or be disbanded but the partners started this knowing it is a speculative venture.   None of us are betting our life savings on this "sure thing long shot".  If Tangible Cryptography fails it will go out with a wimper not a bang.  

Correct.  Thanks.

While the other partners won't cosign, will they still provide their identities?

Could you clarify why you aren't pursuing traditional capital avenues? e.g. business loan or line of credit, or if you're personally securing it, home equity loan or line of credit. In todays <5% APR world, it seems  strange to pay 52% interest...

-bgc

No.  If that is a concern then maybe it works better to consider this a personal loan to me (that just happens to be repaid through the company unless the company defaults).

Of the three partners the idea of expanding our working capital is mine.  The other two are content to just let volume expand organically and if necessary raise our fees and offer a larger discount on direct sales to manage cashflow and prevent "outages".   They have somewhat reluctantly agreed to at least attempt this alternative method of financing.  The company is so far funded with cash.  

As to why we don't get a small business loan?  The reality is it won't happen.  Not for a business with less than a year of history and certainly not at 5%.  Getting small business loan is far harder than most people think.   Honestly if you have good credit you are just better off getting a personal credit card and taking an advance (liability is non concern because any bank is going to require a guarantor on the small business loan anyways).   Of course all that assumes you are a "normal" business.   Mention bitcoin (or anything techy, confusing, or out of the box) and it is a non-starter.

I can finance this on my personal credit card at 9.9% APR however I am looking to refinance my house in the next six months and a $20K advance probably won't help my credit score. :)  If I can't secure a loan the backup plan is to wait for the refinance to be completed and then draw an advance from my personal credit card.   You also mentioned home equity. I would never finance a business venture with home equity.  That is just poor risk management IMHO.  Saving a couple % isn't worth the risk of losing your home if things go south.

As for the rate being punitive.  I don't think the loan will be held for a year at least not at that rate.  The note does allow either party to terminate the note with 30 days notice.  If we can turn over the capital twice per month (we currently acheive higher than that) our margin gives us about 7% to 10% gross profit margin on the borrowed funds (which will cost us ~4%).   That is a heavy price to pay but for short term financing it is manageable. 

Just as an observation - it strike me that there are people that have obtained consumer credit rather than business credit without appreciating the difference.  I have run several SME businesses, and one moderately large enterprise (circa $50M turnover).  Banks (bless them) typically want more collateral than the business have.  To get a loan, I would expect them to have to sign over their houses as personal guarantees.  To give two examples:

a) Sought a $40k business loan to cover some timing differences in forward payments.  Refused despite having a $50k deposit with the bank.
b) Sought an overdraft facility during growth phase.  Debtors were increasing around $2M/month and the business was at break-even with strong cash-flow.  Refused despite obtaining a $5M guarantee from a major shareholder.

Why do people pay more - because they have few options.  That is why returns are expected to be between 30% and 50% per year. (btw, the business above managed that for its investors turning $10M into $40M+ in around four years)

I'd be interested in joining a syndicate for LoC A. PM me if this looks like it might go syndicated.

do those other two hold 50% or more of the equity in the company?

No.  I retain >50% ownership of the LLC.

I am not sure what syndicated means?  Do you mean funded by multiple lenders? 

I added some questions & answers.

Debt does have 1 value over equity.  ;D

Do you know what it is?

If I were you, I would be setting up an additional company for a later purpose....

I am not sure what you are hinting at.  Care to share with the rest of the class?

Debt, unlike equity, allows you expense Interest. You can't deduct dividends.

If you were to set up an investment vehicle(in a country with favorable tax laws) that bought your company's debt, you could expense away most of your llc's profits as interest. That interest could then pass the to the fund. The fund can then disburse these payments to you as a dividend, taxed as capital gains and not income.

Would Tangible Cryptography be required to submit a 1099 form for the interest?  (I am not going to try to hide a $10000+ loan from the IRS, just want to know what sort of paperwork I would be dealing with.)

If interest is paid weekly, how would the payments be made?  (Paying bitcoins is easy, but what about dollars?)

The purpose of us filing a 1099 would be to deduct the interest (we get the tax break, IRS can seek taxes from lender).  Given the gray area surrounding Bitcoin and the limited information we will have on lenders we will not be filing a 1099 and will just lose the ability to write the interest off as a business expense.

Given the nature of our business the easiest method of interest payments would still be Bitcoins.    As an example if a lender was owed $100 USD in interest that would be converted to BTC and paid to the lender.  The question them becomes what rate is used for the conversion.   Using the MtGox 24 hour volume weighted average at a certain day/time once a week would be a fair method.

Example:
$100 USD interest owed.  Note indicates conversion to BTC is based on MtGox volume weighted average price for prior 24 hours every midnight UTC on Monday.  After week 1 @ Monday 00:00:00 UTC the VWAP is $10.80 lender would be paid $100 / $10.80 = 9.259 BTC.  After week 2 @ Monday 00:00:00 UTC the VWAP is $9.85 lender would be paid $100 / $9.85 = 10.152 BTC.  

In discussion this with a potential lender I realized this would be a good method for dollar cost averaging if someone wanted to build up BTC holdings in a slow & safe manner.  One fiat investment, periodic weekly BTC payments.

We are willing to consider other options.  If the lendee would rather be paid directly in fiat, ACH or company check would be an option.

Wow.  That honestly would never have occurred to me.  Is your occupation in accounting or finance.

If the BTC LOC paid 1% I'd be more interested.  Otherwise watching.

Under Option B of LOC request, along with the Money in USD, would you be willing to offer 3% stake in the LLC in the form of Membership Shares?  (Real Shares or Certificates)

Sorry for the delay in getting back to potential lenders.  My day job demanded some late hours today.


Most likely although the loan can be canceled by either party with 30 days notice so it may be canceled prior to that.  It is also possible I may refinance later than 6 months but most likely the loan will not be longer than 6 months.

HELOC is secured by your home.  Indulge me a slight derail.  Nobody should ever get a HELOC for anything.  Period.    I know in this "cradle to grave" ultra-consumerism world we like in that seems insane but the US bankruptcy code provides significant homestead protection.  A protection one voluntarily tosses out the window when they opt for a HELOC.  Nothing is worth that.  The equity in your home is the ultimate safety net.  I have every intention of honoring my bills but what happens if I end up a comma for 9 months, I have to care for a terminal child, or my wife gets cancer and we rack up $3 million in medical bills trying to fight it.   In situations like that most people (myself included) would be financially destroyed.  By business, my savings, and my investments will likely all be wiped out.  My good credit, my name, my reputation equally destroyed.  It is also possible I would lose my job/income.  After a financial anhiliation which wipes out everything you spent your whole life building you might still be able to keep your house ... unless you were foolish enough to attached what would be otherwise unsecured debt to your primary residence via the HELOC.

Of course banksters don't want you thinking like that.  They want you thinking like a HELOC is just a lower interest rate credit card.  SIGN SIGN SIGN get your free moniez.  

No.  No equity will be offered as part of these notes.  Still +1 for asking.  Feels good to have someone wanting a piece of the equity.

Correct.

$20,000 * 1% per week = $200 interest accrues per week.  
There is no compounding as interest-only payments are made weekly.
24 weeks @ $200 per = $4.8K.

I reduced the request for LoC A to 500 BTC as it now appears likely that both lines will fund.  If Loc B also funds, 500 BTC should be sufficient for our needs.    250 BTC of the 500 BTC has been funded.  Lender wishes to remain anonymous.

Update:
LoC A has been fully funded @ 500 BTC.  I think this is an important step forward for BTC based lending.  0.5% per week = 29.6% APR.  While certainly not cheap, it is significantly less than many other similar loans have funded in the past.  A sign IMHO that Bitcoin lending is maturing.

Update:
LoC B has been fully funded @ $20,000 USD. 

We would like to thank all the lenders who participated.  Both LoC are fully funded.  We have no further funding needs at this time.