Source: Mark Borkowski , Mercantile M&A
Business owners can face a variety of challenges when approaching a liquidity or financing event. Sometimes their need for financing is driven by an unexpected slowdown; other times the need for financing is for acquisition or growth purposes. But more often than you might think, a need for capital arises as a result of a breakdown of existing credit facilities through no real fault of the borrower.
Some of the most disheartening circumstances I have seen have involved management becoming blindsided by their traditional financial partners. A business owner can have a long-standing relationship (along with shining credit rating and excellent margins) with a traditional lender and still find their loan called, or “no-brainer” requests for further capital declined. Changing market conditions, concerns around exposure to industry sectors, and risk management strategies can change a traditional lender’s interest in a client and the effects can be devastating.
But there are steps that business owners can take to go on the “offensive” and secure the liquidity they need to grow outside of traditional financing sources. Business owners and managers must learn to become as creative and versed in options for financing their businesses as they are in other facets of operations.
Knowing where to find the different types of financing is crucial.
Regardless of whether the source of capital is domestic or foreign, the key to securing capital is presenting value where others don’t and then translating that value into a workable solution for a lender. There are many ways to put financing together. It’s a matter of being creative and knowing where the money is. Some examples of different vehicles for creative financing that we’ve secured through non-traditional sources include:
- Equity or Quasi-Equity Partners: A well-suited, strategic financial partner, who understands the business and industry, can provide the appropriate financial structure to take the company forward. These partners typically bring cash injections to relieve immediate problems and supply sufficient liquidity to take the company forward and often times are critical to the future viability of a company. Private equity partners can be important tools in situations where owners want to retire or semi-retire and transition the company to family or a management group but wish to extract some wealth from the business.
- Refinancing of Subordinated Debt: Subordinated debt may need to be restructured or refinanced in order to alleviate liquidity concerns. Strategies for accomplishing this objective include: purchasing the debt at a discount; converting debt to equity; exchanging the debt for future royalty payments tied to revenue or cash flow; moving the debt off-balance sheet.
- Cash Flow Management: In many cases, there is significant capital being tied up in working capital. Various operational specialists can help to assess cash flow restrictions and assist companies to unlock liquidity by putting in proper controls and systems.
- Securing of Future Cash Flow Streams: Cash flow streams that are associated with long-term contracts and a high degree of certainty may be sold to a third party.
- Sale Leaseback: Land and/or buildings can be sold to certain lenders at market value or greater using long-term sale leaseback agreements. In this case, the financier relies on the company’s business plan and future cash flows to support future payments.
- Refinancing “Depreciated” Assets: Specific machinery and equipment within a company may have little or no collateral value to traditional lenders. Other lenders, such as appraisal or auction companies, may attach value to these assets that allow other financiers to loan against them regardless of whether they have been fully depreciated.
- Intangible Assets: Many companies find that intangible assets (i.e. patents, trademarks) carry little or no collateral value to traditional lenders. However, some non-traditional lenders will lend against such assets. In fact, there are firms that will attach a value to intangible assets and guarantee that value to lenders.
- Tax Structures: Off-balance sheet structures may generate additional liquidity. For example, intellectual property may be sold into a separate company, which reverts back to the “parent” company after a period of time.
- Factoring: A factor is essentially a funding source that agrees to pay the company the value of the invoice less a discount for commission and fees. The factor advances most of the invoiced amount to the company immediately and the balance upon receipt of funds from the invoiced party.
So what is the bottom line? Accessing capital can be expensive, time consuming, and incredibly frustrating. But it doesn’t have to be, and there are a number of other options outside traditional financing sources. One of the most important advantages in maximizing a company’s access to capital is finding the most beneficial source of capital from the most ideal financial partner.
Sometimes it is a matter of looking for another financial institution that better understands the business. Other times, it requires re-examining the assets of a company from a different perspective. Alternative or non-traditional financing options can help to facilitate and allow for the execution of business plans.
Often, access to the appropriate financing may solve liquidity problems or even present hidden and creative opportunities for freeing up cash flow. Several unique structures may be employed in order to ensure a successful transaction and to maximize the availability of funds.
There are countless ways to improve business liquidity and it makes sense to review options regularly, before additional liquidity is necessary. With the wide avail of creative alternative options for financing one’s business, sometimes a “no” from your traditional lender might actually do you a great favor resulting in a better financial partner. As a result, there is growing demand for more creative financial structuring to solve liquidity issues.
About Scale Finance
Scale Finance LLC (www.scalefinance.com) provides contract CFO services, Controller solutions, and support in raising capital, or executing M&A transactions, to entrepreneurial companies. The firm specializes in cost-effective financial reporting, budgeting & forecasting, implementing controls, complex modeling, business valuations, and other financial management, and provides strategic help for companies raising growth capital or considering M&A/recapitalization opportunities. Most of the firm’s clients are growing technology, healthcare, business services, consumer, and industrial companies at various stages of development from start-up to tens of millions in annual revenue. Scale Finance LLC has offices throughout North Carolina including Charlotte, Raleigh/Durham, Greensboro, Wilmington, and Southern Pines with a team of more than 45 professionals serving more than 120 companies throughout the region.