Capital Structure Strength as Manifest Destiny

Posted on: July 25th, 2017

capital structure Corporate growth often happens in push-pull manner. At times the market speaks loudly and sends strong demand signals. Other times, there’s a lot of noise that is difficult to read.

The intrepid entrepreneur stands in the breach between unforeseeable demand and new product launch, ready to catalyze market forces.

Yet with new products and markets, there’s a lot of unknowns – how quickly will it catch on, how long will the sales cycle be, will demand sync up with production? All of these unknowns create uncertainty for a middle market business.

The key to fueling expansion and mitigating these various risks lies in harnessing the power of capital structure strength. Capital structure strength means having the right blend of capital at each step of the growth stage.

Capital structure strength gives you the liquidity balance to fund each growth step, depending on its risk and duration. If the step is a short term, low risk step, bank financing is the best bet. If the step is a 3 year new product launch, then long term debt or equity is the best bet.

Often, each company has simultaneous activities which need to be assessed separately, requiring a bespoke capital structure that to satisfy the competing demands for cash. Capital structure strength is achieved when a company has the right blend of capital availability, flexibility and scalability.

This creates a dynamic funding model across the lifecycle of capital need. This approach takes risk out of the growth equation for you, and allows you to invest the required amount without putting too much strain on the business. Capital structure strength is easy to theorize but more challenging to put into place.

Once implemented, it will give you the ability to think at a higher level about your business, and help you more accurately predict how much cash is needed to realize your long term objectives.

In the end, more capital gives a company a huge advantage. It gives you the time and liquidity cushion needed to get through tough times and unpredictable events.

In the acquisition financing arena, capital availability is destiny as companies require reliable access to capital to grow over the long term. Unforeseen capital needs usually arise when acquirers least expect it. This can cause some concern for the acquisition financing provider, especially when covenants tighten up and that working capital availability is utilized faster than expected.

Mezzanine debt borrowing is usually a straightforward activity that many companies use for funding of transitional growth. Mezzanine debt lenders are highly transparent about their due diligence approach and their post-closing loan management making it easy for companies to engage with.

Elections have consequences and positive ones at that for the acquisition financing middle market. While much media attention is paid to the direction of the yield curve and the Fed’s likely rate cuts, scant attention is paid to the more important drivers of the acquisition financing market – business psychology and regulatory climate.