While the thought of using operating revenue may be appealing when addressing your capital requirements, your business may not be able to support a large-scale investment or growth initiative on its own. Plus, reducing or depleting cash reserves can leave a business vulnerable, particularly during an economic downturn.
Fortunately, financial services providers offer an array of options to raise capital —the right solution being one that suits the goals, size and structure of your business; provides manageable terms; and meets the risk appetite of the lender(s).
Structures and Solutions
Depending on the amount of capital needed and how it supports your overall business plan, there may be multiple options at your disposal through your bank. Senior Loans can provide financing for capital expenditures, ongoing working capital requirements and growth strategies. Typically secured by company assets and usually the cheapest source of capital, senior loans can provide stability among uncertain market conditions when finding alternative forms of financing can become increasingly difficult.
If you are unable to access enough capital through a senior loan for any number of reasons, such as size or credit limitations, consider mezzanine financing, which is a combination of junior or unsecured debt and equity financing and is not as dependent on collateral. Mezzanine loans can help to bridge a financial gap, including when:
- Funding a merger or acquisition.
- Cash is leaving the business as part of an ownership change or buyout.
- All or part of an ownership group wants to maintain the current equity balance. Mezzanine financing is non-dilutive, meaning the borrower(s) keep their current share of the business.
Although a more expensive form of debt, mezzanine financing remains a viable and flexible solution in a rising interest rate environment, even when compared with senior forms of lending.
There also are times when an investment may require more capital than a single lender can absorb from a risk perspective — and securing multiple lenders on your own is inefficient. With a
syndicated loan, your business can obtain financing through a credit facility where one bank will work with other banks to provide the necessary capital.
With syndicated loans, you benefit from the efficiency of working directly with one lender, meaning only one set of payments and one set of terms. On the back end, your lead bank manages the coordination, keeping the process simple for you while parsing out risk among multiple financial institutions.
Considerations
A successful capital strategy depends on detailed planning and engaging partners in the process as soon as possible. Finding a lender that knows you and the business you have built and that has the strength and stability to continue lending in a tight economy can make all the difference in developing the right solution.
With any solution, your bank will need to know how much debt your company can support and your ability to pay it back — all of which will be determined during the due diligence and debt underwriting processes. Your plan to raise capital also should account for both favorable and unfavorable rate environments with terms your business can meet without undue stress.
