To operate effectively and grow, middle-market companies need capital: both working capital and capital to fund growth. Very few companies are profitable enough to generate all the capital they need from current cash flow. So where should this financing come from?
Successful business owners have a number of options to choose from. They should choose based on their own needs, not on standard formulas that lenders sometimes try to force fit to apply to all companies.
Begin the Process of Finding and Keeping Bank Credit
A helpful starting point is to think of your company’s financial needs as a tree. The root system is your core operating financing. The trunk and branches are your growth funding. And the top branches and foliage are the financing you need to exit the business eventually. The parts of a tree grow substantially in sequence, the roots before the branches and the branches before the leaves. So a company must secure core funding before it tries to get growth financing. Exit funding generally comes later.
Some companies make the mistake of trying to get growth financing before they have obtained a firm base of operating financing. They may fail to recognize which category a particular kind of financing belongs to. For example, asset-based financing can look like growth funding. In many, if not most instances, it is really a type of operating funding.
Well before considering an alternative for growth capital like private equity, a middle-market company should have financing in place to fund its basic operations and facilitate future profitability and growth. A financial platform such as a working line of credit removes a great deal of uncertainty from a company’s outlook, freeing up management to concentrate on strategy for long-term value creation.
For many companies, banks may be the best source of operating and growth financing. To be sure, emerging growth companies face challenges today getting credit from banks, which are constrained from middle market lending by regulatory risks and costs. In the current environment, any loan or credit line to an emerging middle market company must be able to survive scrutiny by regulators as to the borrower’s credit worthiness.
Despite these challenges, lenders and entrepreneurial borrowers can come together better than they often do. We believe there is a Road Map for borrowers to obtain an appropriate debt structure to provide operating and growth funding and for banks to make sound loans that will be safely repaid.
Contributing Authors
The below Newport partners came together to share their expertise concerning middle market companies and their need to find and keep adequate funding.
