Capital / Cash Management

3 ways to tap into capital for your company’s growth

financial strategies

There are a lot of good reasons to raise capital for your company. You might want to:

  • Support organic growth or strategic acquisitions.
  • Provide a dividend to balance the concentration of wealth between your company and your individual investments.
  • Help your management team or next generation of family buy into your business for fair value.

Whatever the reason, you can raise money and minimize risk without losing equity ownership in your company. Here are three approaches to finding the capital you need.

1. Explore your options in private-capital markets.

Commercial banks may not be the sole source of debt capital for your company. They tend to be more focused on assets and sufficient collateral. Look into alternative, non-bank commercial lenders such as credit opportunity funds, business development companies, insurance companies, non-bank direct lenders or family offices.

Non-bank commercial lenders — also called direct lenders — are a large and growing component of the private capital markets, with more than five-thousand institutional participants. These lenders are increasingly enterprise-based in their investment analyses, and consider EBITDA, cash flow available for debt service, and the quality and consistency of a company’s earnings to determine the amount and cost of capital they will provide.

Determine the amount of funding needed to meet your goals, then the type of lender and capital structure that’s best for you. A competitive process for potential capital providers is the most effective way to assure the best deal.

2. Look into cash-flow borrowing.

CEOs often believe the amount of reasonably priced senior capital their company can obtain is limited by what hard assets they have as collateral, such as inventory, receivables, property and equipment. But that is no longer true.

Over the last two decades, businesses have become less dependent on owning hard assets to generate profits. The predominant indicators of a company’s health today come down to having the people, strategies, processes, systems and technologies in place to beat the competition.

For many companies, commercial health is seen through the growth and predictability of profits, rather than the amount of hard assets on their balance sheet. Such businesses will usually have a significantly greater amount of funding available to them from non-bank cash-flow lenders.

Such lenders will base their analyses on a multiple of EBITDA, rather than a percentage of collateral. Interest rates will be slightly higher than asset-based loans. While commercial banks providing asset-based loans may still be right for you, they are no longer the only option.

3. Consider a dividend-levered recap.

If you don’t want to sell your company, but want to “take some chips off the table,” consider a dividend recapitalization. Essentially, you will be borrowing against the future profits of your business to generate large dividends. These transactions often have significant tax advantages. The debt will be rapidly amortized, reducing your balance-sheet risk within two to three years.

Dividend-levered recaps help to mitigate the risk associated with having the majority of your wealth tied to a single asset — your company. Recaps balance the wealth between your company and personal holdings. You can maintain your existing ownership stake and take almost as much capital out of your company as you would in a PE deal, while avoiding the fees that PE firms charge and the disruption they can create.

The same methodology can be used if you wish to transfer a portion of your company’s ownership to the next generation or to your management team.

Keep in mind there is no one-size-fits-all solution. Consider all your options and be sure to hire a professional who can thoroughly analyze your financial needs, and has the ability and experience to create competition for your transaction in the private-capital markets.

Related articles by Mark Taffet:

Cashing in without cashing out: Dividend-levered recapitalizations

What’s better: cash flow or asset-based borrowing?

How to raise capital without sacrificing equity

Category : Capital / Cash Management

Topics :  , , , ,

About the Author: Mark Taffet

Mark Taffet is CEO of Mast Advisors, Inc., an M&A and strategic advisory firm focused on maximizing value for middle market companies. Mast Advisors provides capital raising services through an affiliation with SPP Capital Partners, a

Learn More

Leave a Reply

Your email address will not be published. Required fields are marked *