Following the success of our series of events on scaling for growth and exit, we’re hosting some further events focusing on different types of funding mechanisms and examining at what point in the life cycle of a smaller business they might be applicable. So the next event we have lined up will explore debt finance and how to raise growth capital through debt.
The advantage of debt finance is that unlike equity finance it doesn’t involve giving away shares in the business for capital. However, as a vehicle it’s generally better suited to more established or cash generative businesses with tangible assets, so in brief, businesses that can evidence they can service the debt plus fees and interest from cash flow. If there are existing debts in the business such as BBLS or RLS, these will often have to be repaid, as it’s likely a lender will require a first charge on assets. Interest-rate wise, expect to add a 5/6 point premium on top of Libor, currently 5.25%. For a company without much collateral, plan for an additional 2/3 points since you’ll likely need to involve a specialist mezzanine debt who will be comfortable taking a position but for a higher premium return.
Debt finance can really help to fuel growth and even in today’s climate of high interest rates it can still be some of the cheapest forms of capital. Debt finance should certainly be a consideration to fund acquisitions or MBOs. Most recently, we’ve helped secure funding for a partnership buyout. In this case, it was a mature business where one partner wished to take a well-earned retirement while the other wanted to stay on in the business. We were appointed to advise on and identify the best mechanism to achieve this to satisfy both parties’ needs. The company’s strong balance sheet supported the transaction, and we were able to secure asset backed finance to achieve the partner buyout.
We also work with companies helping them use debt to finance acquisitions, in this instance we source and structure a workable finance solution to enable the acquisition to proceed. Understandably, a lender will not part with cash lightly as they need to mitigate their risk, so robust pre- and post-integration balance sheets and projections must be submitted along with full disclosure on potential liabilities. The lender will stress test projections looking at best- and worst-case scenarios and make a decision based on the level of perceived risk. From historic dealings, we’re very versed in the criteria required by banks and alternative lenders and our financial modelling and projection expertise will ensure that lenders receive the data in the format they need, thereby expediting the process. In equal measure, we operate with candour, and if we see that a lender’s criteria isn’t likely to be met we advise early on.
If you’re interested in debt finance and would like to find out more or attend our breakfast meeting in London on debt finance on October 3, 2024, please do get in touch.
Recent Articles
No recent articles found.
