The Value of Scale Up Capital for Mid Market Companies

Posted on: August 2nd, 2018

scale up capital

Every mid sized company has aspirations to grow faster and bigger than its competitors. In the fast-paced world of business, companies remaining stagnant or growing too gradually are losing ground on their competition.

One ingredient in the growth formula that cannot be stressed enough is the need for scale up capital. Scale up capital acts as the fuel that powers a mid market firm’s accelerated growth, whether it be natural or through an acquisition.

Growing naturally

Mid market companies with big dreams need scale up capital to invest in new areas and transform their business. This may mean entering new markets to expand customer base, innovating new products that will diversify a business, or something entirely different.

Even as businesses continue their regular operations, they can without a doubt benefit from added capital, which is useful as a catalyst for driving revenue via new product launches and regional expansion.

Growing through acquisitions

The most common mistake an acquiring company will make is to vastly undershoot the capital needed beyond just the target company’s purchase price. When merging your business with another, extra capital on-hand is especially needed to catalyze growth and pursue immediate new opportunities that the acquisition presents.

How much additional capital is needed? Firms can use cash flow analysis and liquidity analysis to best estimate the capital they require.

Even aside from driving growth, scale up capital plays an important role as a safeguard. Extra capital on hand provides a liquidity cushion that firms can rely on should something unexpected happen.

Any adversity that arises can be weathered using the extra capital on hand as an insurance policy. Scale up capital is flexible; it can be used to drive growth in just about any way thinkable.

However, the common theme for scale up capital, no matter how it is spent, is that it simply enables companies to do more. With greater capital bandwidth than ever before, mid market companies are poised to receive favorable borrowing terms.

Owners who are serious about transforming their mid market business into the business of their dreams need to understand the value of scale up capital as a growth catalyst.

My Business Needs Scale Up Capital… Where Do I Go?

These four types of lenders will ensure the most capital, using EBITDA as the basis for the loan. They generally have flexible repayment terms and no required personal guarantee.

Mezzanine Lenders
Cash Flow Based Lenders
Private Debt Funds
Unitranche Lenders

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.