“Removing Roadblocks on Your Path to Success”
Gaining Capital for Growth
A new year brings with it new opportunities for growth. This month on our blog, we discussed funding options and the ability to access capital to grow your company when the opportunity arrives.
Middle market funding is one of the best ways to gain capital for growth. There are many types of debt financing available, and each one has its benefits under the proper conditions.
- Cash Flow Loans: During the economic boom, loans of this type were common and made based on expected cash flow. There is very little emphasis on collateral value tied to securing these loans, but instead they are based on financial maintenance covenants that must be met on an ongoing basis. These loans are no longer as popular in the lower Middle Market due to the challenges that many smaller companies have had in meeting these types of covenants.
- Asset-Based Loans (ABL): Often, the covenants of these loans only become effective in the case of default or when excess availability falls below a specified amount. These loans are generally secured by collateral representing all the assets of the borrower, and typically require frequent reporting on the composition off assets securing the loan in the form of a borrowing base calculation which monitors collateral levels.
- Second Lien Loans: These loans are a form of secured financing where the lender holds a secondary security position in the collateral of a senior lender who maintains a first security position in all the assets of a borrower. They are generally offered by finance companies desiring higher yields with some perceived level of protection from the collateral. Though generally more expensive than first lien loans, due to the security provided by the second lien, they tend to have a lower cost than mezzanine loans, equity financing or high yield offerings.
- Subordinated Debt: This form of debt is generally used to finance the expansion of a company during a significant period of growth. Subordinated debt can incorporate a mix of debt and equity financing. It is generally the most expensive type of borrowing and can result in the dilution of existing equity investors if there is an equity component in the transaction and specific milestones are achieved by the company during the term of the loan such as revenue growth and profitability measures, or conversely in the event of a loan default.Other forms of Middle Market financing include Senior-Secured Loans, Term B Loans, High-Yield Offerings, Factoring and Unitranche.
Once you are aware of the different types of financing, there are many questions that can be asked to help identify your needs and if the above funding solutions should be on your radar.
For example, have you considered whether your current availability of capital is adequate to accommodate your near-term operating plan or to take advantage of a high- probability growth opportunity? As you look forward to your projected plans for the year, it is helpful to be aware of your current capital, and to know exactly what funding is available. It’s also helpful to have a backup plan so that lack of funding does not prevent you from seizing an opportunity that could take your business to the next level.
Is your current credit facility/borrowing base priced at market rates based on your recent operating performance? It may be possible to get better rates than you have had in the past if you know the proper information to present to your lenders.
Are there any projects related to your near-term strategic plan that might require a unique debt structure or equity investment? Some of the funding options above allow new debt to be structured so as to be considered equity for your company. Being in a position where you have this equity can help ensure that you are able to follow through with those plans.
Do you need to consider restructuring your existing debt due to unforeseen events and circumstances? If you are dealing with a slowing market and a few of your vendors are slow to pay, you may need to look into this option to keep your company solvent.
There are many questions to consider, but here at PCG, we are pleased to be home to many CFO Advisory professionals. They will gladly sit down with you and discuss potential solutions for your unique capital requirements in order to keep a smooth running business while also meeting the capital expenditure needs that will allow you to execute on your growth plans.
Until next month, we wish you the very best and much success in your business.
March 2011 Newsletter
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