How to Best Access Capital
by Rudi Scheiber-Kurtz, CEO of Next Stage Solutions, Inc
Depending on which stage of business you are currently in, each capital market will have different lender requirements, limitations and costs.
The cost of capital for a private midmarket company can vary by size, capital type and assumed risk. Generally speaking, debt financing will be less expensive versus equity financing. A $1M mezzanine loan will be around 20% in annualized gross financing costs versus one at $25M that will be closer to 9%. This size difference is similar in Private Equity.
A bone of contention for business owners is they do not want to provide a personal guarantee. Well, unless you are a larger firm and can qualify for a larger loan, you will not win this battle. Be prepared to offer a personal guarantee and collateral.
According to the 2014 Pepperdine Private Capital Markets Report (PPCM) the main reasons for transactions not to go through from the lenders perspective are:
- Unreasonable seller or buyer demand
- Economic uncertainty
- Insufficient Cash Flow
- Lack of Capital to finance
- No market for business
- Seller misrepresentations
The overall consensus in the business world is that the lending landscape will be improving over the next 12 months. Given the increased demand of loans, there will most likely be more stringent due diligence, so you need to plan accordingly. Lots of businesses will already be backed by government loans.
The weights to the multiples method game are also interesting. From the same PPCM report, here is how the lenders look at multiples, depending of course what lenders you are talking to and in what industry your business is in:
- 48% use revenue multiple
- 19% use EBITDA multiple
- 12% use Cash Flow multiple
Uncertainty in the economy will be an ongoing risk for years to come, so a business owner must have more robust plans to include outside, uncontrollable risks with sensitivity modeling. Strong cash flow is always a good thing.
Now let’s take a look at the other side of the table – YOU the business owner and CEO. Almost 50% of businesses feel constrained in achieving their strategic goals because of tight lending requirements according to PPCM. One of the reasons for the May RudiTuesday is to share with you how you must prepare your business before approaching a lender.
The better prepared you are before starting a conversation with lenders the higher your potential in getting the right kind and right sized funding. Do take the time to work on your business, increase cash flow and EBITDA, which increases your business value. Reducing your costs is important, but cutting costs to the bone is not sustainable. Focus in reducing your fixed costs and increase the variable cost to bring greater flexibility to weather future market uncertainties.
Don’t forget your employees; they are an important component of value creation. Keep them motivated and engaged in your business. Make them part of the solution and let go of the people who are not willing to change.
A comprehensive lender package will make a strong first impression. Reaching out to the right lenders for the right capital sources will enhance your chances. NSS prepared a video for you with some fist steps and take away’s:
Contact us with any questions. 617-449-7728