Now that the elections are over and the fiscal cliff has been avoided at least for now, private companies will need to navigate through the anticipated economic volatility of 2013 and position themselves for growth.
Indications are that financing may be easier for emerging growth companies in 2013. An indication of how the lending landscape has improved: the small business loan approval rate at
big banks in December of last year was 50% higher than at the start of 2012. Private capital available to invest in promising growth companies is at an all-time high.
Let’s review the alternatives for private companies. Public companies have alternatives for financing growth through big banks and Wall Street. For private middle market companies, traditional sources of growth capital have been internal capital generation from profits and bank lines of credit.
You will need to mimic public companies by expanding your sources of capital and create a backup plan in case your current sources become unavailable.
The following are 10 capital sources available to private companies. They have different costs, restrictions and availability. Smart CEOs and CFOs need to be familiar with all of them.
Line of Credit/Asset-based Loans - An agreement between a financial institution, generally a bank, and a borrower to provide a certain amount of loans on demand. Generally, lenders will want security such as a lien on receivables or inventory. Asset-based loans are lines of credit secured by all of the assets of the company. A line of credit can be called, reduced or not renewed by the bank. Relatively inexpensive money--but high risk particularly if called and if secured by all the company’s assets.
Term Debt - Usually applies to assets your business is purchasing, such as equipment, buildings, land, or machinery. Scheduled repayment term is fixed and generally extends over more than one year. Lower risk but higher cost.
Inventory Financing - A line of credit or loan that enables a company to purchase inventory, which serves as collateral if the business cannot repay the loan.
Receivables Factoring - A business sells its account receivables (unpaid sales) to a third party at a discount. Typically used by companies that sell products not services.
Private Placements - The sale of securities to a small number of investors to raise capital. Relatively expensive when combined with placement fees.
Fixed Asset Financing – Borrowing secured by an asset used in the normal course of business that is not readily convertible to cash. Examples include machinery, buildings, and fixtures. Generally lower cost and easy to obtain since fixed assets secure the debt.
Sale-Leaseback - A transaction between a bank or investor and a company that sells and leases back a fixed asset over a long-term. More complex than a loan and involves many accounting issues.
Small Business Administration Loans - The 7(a) Loan Program, the SBA’s most common loan program, includes help for businesses with special requirements. The 504 Loan Program provides small businesses with long-term, fixed-rate financing.
Private Equity - Private equity makes investments directly into private companies from capital raised from retail and institutional investors. Requires giving up some ownership in your company.
Basic, Often Overlooked Sources – A private company has many internal ways to generate cash and create a “permanent” no interest loan through business practices, accounting policies, cutting overhead and other costs or just tapping your friends and family for a loan. For example, if your competitor pays their suppliers in 45 days and you pay in 30 days, you are leaving money on the table. Conversely, if your payment terms are overly generous you will need to finance cash needs that could be met by better billing and collection efforts. Lastly, are your suppliers giving you their best deal?
The year to come looks to be an opportune time to obtain financing to fund your private company’s growth and position yourself for the future. Don’t miss the opportunity.
Contact Mike at michael.evans@newportboardgroup.com
