Is it a Good Time to Finance your Growth?
We think so. Accessing the capital markets for future growth before interest rate increase makes sense.
My dear friend and colleague Debra Drapalla, SVP of the Middle Market Lending Group at Webster Bank shared the following with me. Keep in mind that her middle market lending group focuses on companies with $50-$500M in annual revenue.
“Presently, there is an abundance of capital available in the market by banks which are sitting on large reserves from the Fed’s stimulus programs to thwart the Great Recession. If a middle market company presents a sound business plan for their financing needs, they should receive very competitive proposals from banks for both interest rates and credit structure. It is definitely a buyer’s market for bank loans during this stage of the economic cycle.”
If your company falls below the $50M revenue range, it can be a daunting task. The smaller your business the harder it gets to access reasonable funding and convince the lender.
According to the Pepperdine Report for Q2 2015 on Private Capital Markets, 61% of companies with $5-$50M in annual revenue will be looking for debt financing from a bank. Of those, 39% are projecting that this will be difficult.
Accessing the right-sized capital at the right time is a balancing act and requires adequate time. I created a chart for you below that might help you identify the approximate stage with a sample of capital markets available to you. The smaller the business, the more difficult it is to raise capital. It is so very important, that you can de-risk your inquiry for capital to the investor by providing solid and realistic numbers and you may have to provide a personal guarantee. Having a strong sales history and being on a fast track also helps.
We know that interest rates will be raised, some speculate as early as September. The US economy is starting to show signs of strength and hopefully will lead us toward faster growth. What happens when the interest rate is raised? Things that it will affect will be Cost of Borrowing, Effect on Prices and Plans for Marketing. This will also affect your vendors, so allow for some elasticity in your forecasting. You might want to revisit your strategy and business plan and evaluate whether you have the proper outlook and risk criteria in place.
Let me emphasize the importance of size of your business. The larger the annual revenue, the lower your Cost of Capital (CoC). The market views it as less risky. Public companies will enjoy an even lower CoC and gain more trust in the market, as they typically are run more efficiently. More on that in another blog!!
However, if you are in the $5-$50M revenue range as many of our clients are, you may benefit from working with a trusted advisor like NSS who can guide your through these complex preparations and transactions. We can provide you with alternative options you may not have thought about, such as:
- Mezzanine debt
- Subordinated debt with warrants
- Leveraged asset-based loans
- Secured trade credit
This of course also depends on where you are in the process. NSS tailors its approach to your needs. You may want help with the preparation, connections to the right lenders, negotiate the best terms or all of the above.
Listen to our RudiTuesday video on “Access to Capital” for additional tips in how to prepare.
Take this opportunity and act on it now before interest rates increase significantly. Securing the appropriate financing now can give you a competitive edge so that you can expand, grow and bring on the right talent.
We also developed a funding guide and check list for our clients to properly prepare for a lender meeting. We will be glad to provide this additional resource so you can start on your deliverables. Sign up here for a copy and we will be glad to send it to you.
Begin to work on that list, let us know if you need help, so that at the end you have a greater chance of locking in a strong financial round.
So where might you be in this process? If you are not ready, you are not alone, the majority of businesses we work with do not have the internal resources or time to have all the ‘docs’ lined up! Start today with the conversation of how much money you need to raise, the timing of it and the financing options you should consider. Decide where you are in the process and give us a call if you need help!
In conclusion, it is a buyer’s market and a great time to access capital. Larger companies have easier access to the capital market. Smaller companies can fundraise successfully too, so consider closing the funding gap today and remember, first impressions are lasting.
According to lenders, companies are generally not prepared. You can change that statistic!
Contact us at 617-449-7728