4 Best Ways to Financing a Business

Posted on: April 30th, 2019

Financing a business is a straightforward affair, as long as you know what you are doing. Many approach this project with scant understanding of the different types of loans. Broadly speaking there are 2 major different types of loan – cash flow and asset based.

Within these two general types, there are at least 6 additional subtypes, with each subtype further segmented by the type of lending platform. For example, banks and finance companies both provide asset based lending, but they are very different in loan structure, collateral required, and terms and conditions. Additionally, the process utilized by the borrower to obtain the loan is different.

These multiple variables create confusion for a prospective borrower and requires them to be well researched to even identify options, much less to find the right lender. For smaller companies doing this for the first time, navigating this sea of options and process requirements can create stress. It requires expertise, deep market knowledge and out of market contacts with new types of lenders. If you are acquiring or growing rapidly, you quickly outgrow your local financing resources. You need help getting to the next level of lenders, who can bring larger dollars and more flexible structures to drive your scale-up.

Additionally, raising this type of capital is challenging, requiring a different skill set than most companies possess internally. CFO’s rarely have the understanding and market contacts to do this effectively. Your trusted advisors – such as CPA and lawyers might have some experience, but generally do not have the relevant expertise or contacts. They key is bringing in new resources and perspectives into your organization. Here are the Attract Capital 4 best ways to financing a business.

Find a highly reputed advisor – advisors are professionals that have a proven financing process that has been used many times before. They have the ability to take your capital raise from concept to reality through their process.
Create a Financing team within your company – your advisor needs to be surrounded by a good CFO and good C-level people to learn the company and sell the deal. The stronger the team supporting the advisor, the more effective the financing process will be.
Consider structural options – the advisor will explain all the various structures and the benefits of each. Reflecting on each possible structure allows you to make the best decision for both the immediate and longer term capital need.
Gauge your internal readiness to go to market – good advisors will tell you what has to be in place to be able to get funded –improved numbers, longer financial trend, better clarity around the story etc. Better to clean these things up pre-launch of the deal.

During their underwriting processes, acquisition financing providers analyze probable performance projections for their proposed borrowers. The underwriter often toggles between a few scenarios to sensitize the growth variables leading to slower revenue and margin growth over time. The lender’s underwriting view is usually an extension of its credit intelligence and historical experience.

Mezzanine debt loans occupy the risky echelon beneath the bank but ahead of the equity in a capital structure. They are naturally subordinated to the bank loan via an intercreditor agreement wherein the senior lender retains the power to block their interest or force them to standstill.

In the middle market, acquisition financing providers are regarded as super intelligent and hardworking. They have distinguished themselves at elite banks or consulting firms and possess the ability to synthesize voluminous levels of info into a coherent, succinct takeaway or observation. This skill is extremely valuable in attributing causation to business drivers in a financial model used to foretell the future.