Growth Capital Financing and The Need for Options

Posted on: September 17th, 2021

growth capital

Many companies experiencing supply chain volatility need growth capital financing. These companies had months of losses in 2020 and stretched out their vendors a bit to compensate for it. As business returns to semi-normalcy in the first half of 2021, vendors no longer are a willing source of liquidity and need to be brought current.

Companies seeing revenue scale-up need their vendors more now then ever, especially in a world of supply chain disequilibrium. Many companies are in a strange, unaccustomed position with large backlogs of customer orders with vendors unable to ship due to being out of stock. Financially strong companies that bring their vendors current are better trading partners and are more likely to get preferred treatment from their suppliers, in the current world of supply shortage.

Growth Capital Financing Options

Smart companies need growth capital financing options more than ever, given this unpredictable economic climate. There are several ways to go about improving your growth capital arsenal. One easy and efficient method is obtaining funding against your receivables. There are many types of receivable financing ranging from factoring to bank lines of credit. This type of funding will help improve your liquidity by giving you upfront cash against the value of your receivables, enabling you to get ahead of other important expenditures such as old accounts payable, increased stock and increased staffing.

The non-bank lenders move quickly and do not consider the credit rating of the borrower, but rather the quality of the receivable account debtors and their payment histories. Another option is an SBA loan which is usually a term loan but can also include a line of credit. These loans are capped at $5 million and most of them include real estate as collateral. The SBA, as a government entity does not move quickly, but is a good source of long-term growth capital. A third option is a commercial & industrial loan from a regional or community bank. Also known as C&I loans, these are term loans provided to fund growth or acquisition.

Technically, these are middle market loans, but they are classified as C&I loans internally for government reporting purposes. They are long term and low cost, though the underwriting and approval process timing depends on the originating bank. Finally, mezzanine debt loans are a good source of growth capital financing. Though higher in interest rate, the loan sizes are significantly larger, and the structure is more flexible than other bank loans.

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.