Acquisition Funding Options for Texas Companies

Texas has a booming economy that provides growth opportunities for all entrepreneurs.  There are many banks both large, regional and community across the state that offer loans to successful companies.  Many bank lenders adhere to a strict collateral formula approach that leaves little room to fund ambitious acquisition growth.

As Texas’ economy has migrated from natural resources to technology & services, bank lending approaches have not kept pace.  Most tech-based growth companies sport little assets on their balance sheets, which makes it challenging for banks to lend to.

Rather than inventory, equipment and real estate, the new breed of Texas growth company is likely to have long term revenue contracts on its books. While low in traditional assets, these companies are strong in customer relationships and recurring revenue.  Their competitive advantage is defined by the strength of their company culture and the quality of human talent they have.

Through building efficient back end delivery, these companies have the ability to scale quickly and expand regionally. Many find the best way to grow their market footprint is through regional acquisitions.  This can be throughout Texas or in adjacent areas throughout the South or Midwest.  The strong economy that has buoyed so many middle market companies has also helped increase the profitability and capital base of the Texas banking system.

It has given rise to many non-bank lenders such as business development corporation and mezzanine debt funds, who are currently flush with investable funds.  As lending sources grow, they look to add assets in less competitive niches, such as cash flow-based loans and acquisition financing.  Looking across the Texas Funding Ecosystem there are many strong options, besides local banks, available to meet your acquisition funding needs in 2019.  Here are the top 5 acquisition funding options for middle market companies in Texas.

1. Business-Oriented Community Banks – these banks are looking to add more commercial & industrial loans, as opposed to real estate loans. They are relationship oriented and do a great job of providing service to you during the deal as well as after the deal has closed.  They can often fund 100% of your lending need. Deal sizes can range from $2 million up to $15 million.
2. Leveraged Finance Departments within Large Banks – large banks usually have special groups within their organizations to assist acquiring companies with financing. Often this is called direct lending, and it is from people that can make a cash flow loan as opposed to an asset-based loan, for the bank.  Deal sizes can range from $5 million to over $50 million depending on the size of the bank’s balance sheet.
3. Private Debt Funds – these are non-bank lenders who can provide more than a bank, at a slightly higher cost. They are cash flow and loan to value-based lenders and are a good source of credit for companies that need at least $25 million.
4. Business Development Corporations – BDC’s are public funds that function like Real Estate Investment Funds. They are cash flow lenders and are a good source of credit for companies that need a check size of at least $10 million.
5. Mezzanine Funds – these are private funds (such as SBIC’s) who make cash flow-based loans to growing companies. They are a great alternative to raising equity, which is both expensive and dilutive. They are cash flow lenders and are a good source of credit for companies that need a check size of at least $5 million.