Winning Moves to Successfully Raise Capital

Consider the following alternative sources to raise capital for your venture:

1. Asset Based Loan – there are loans backed by your assets, such as receivables and equipment. Loans can be either lines of credit or term loans that are repaid over time. The lender can be either a bank or a non-bank lender and usually advances a fixed percentage against the borrowing base for each asset. The advantage of asset-backed financing is its ability to fund tough deals and the speed of its closing.
2. SBA Loan – these are loans originated by a bank that are backed by an SBA guaranty thereby making it more lucrative and less capital intensive for a bank to hold on their balance sheet. SBA loans can be used for working capital, growth capital and mergers and acquisitions. There are specific requirements for loan structure and industry type within the SBA program. The advantage to an SBA loan is the low cost and the longer repayment terms offered.
3. Unitranche Loan – Finance organizations known as Business Development Corporations have become one of the most important nonbank financing sources. Their popularity is on the increase, due to their ability to offer both a senior and a subordinated loan in one package, known as a unitranche loan. This provides you with a one stop source of financing. Most unitranche loans are for middle market companies that have greater than $10 million in EBITDA. The advantage of this form of finance is the speed to close due to only having one party and the relatively low cost.
4. Factoring – This has risen in popularity as banks have vacated lending to small businesses. Factors are secured lenders that advance against receivables. The charge monthly fees which can be very high. They are less focused on the credit quality of the borrower than they are on the credit quality of the account debtors. The advantage of the Factor is their ability to close very quickly. The negative to working with the factor is the high cost of funds.
5. Private Equity – Private equity firms provide growth equity to rapidly growing middle market businesses. This is akin to venture capital for middle market companies that have the ability to grow 10x over the next three years. Equity capital by definition is much more expensive than loans, as it has a higher hurdle return due to the low position it occupies in the capital structure. While expensive, private equity allows a borrower more flexibility than a lender and gives the company more growth headroom.
6. Mezzanine Debt – Mezzanine debt has increased in popularity as banks have reset to more of an asset based lending approach. This form of debt is highly flexible and has longer repayment terms, making it patient capital. Mezzanine lenders have a more passive approach than private equity investors and are generally very supportive of management’s plans. Mezzanine is much less expensive than equity and does not require ownership of shares. It is a great way to raise acquisition or growth capital, without giving up control.