Capital / Cash Management

How to raise capital without sacrificing equity

There are a lot of good reasons to raise money for your company. You might want funds to support organic growth or strategic acquisitions. You might want to provide a dividend to balance the concentration of wealth between your company and your individual investments. You might want to help your management team buy into your business for fair value.

Raising money doesn’t mean you have to sacrifice equity ownership in your company, however. Here are four tips to help you navigate other financing options.

Tip 1: Explore your options in private capital markets

Many CEOs believe that commercial banks are the sole source of debt capital. However, this was never true and ignores an enormous shift in capital availability since the Great Recession.

Prior to 2007, commercial banks were aggressive in their lending practices and investment accounts. When these actions threatened the national and international economy, the government placed regulations on commercial banks to prevent another meltdown. These leverage guidelines limited banks’ capacity to lend and enforced higher fixed amortization rates.

The market reacted by creating several alternative, non-bank commercial lenders. Now, more than 5,000 such lenders comprise approximately 50 percent of the private debt capital available to corporate borrowers. These lenders take various forms:

  • Credit opportunity funds
  • Business development companies
  • Insurance companies
  • Non-bank direct lenders
  • Family offices

Tip 2: Consider alternative lenders

The process of raising capital from commercial banks and alternative lenders is the same. The critical difference between the two involves the risk each can take on and the repayment terms they can offer.

Non-bank lenders tend to be more comfortable with cash flow lending and are not limited to asset-based facilities. While they may be a little more expensive, they tend to have less stringent fixed amortization, looser covenants, more generous leverage multiples and no personal guarantees.

The eight to 12-week transaction process is similar to how a bank approves a loan: They receive an offering memorandum, perform their own credit review and engage counsel to document the deal.

Alternative institutional lenders generally require a minimum deal size, with $10 million a common rule of thumb. Companies should be at least mid-sized, or have $3 to $5 million in EBITDA.

Tip 3: Let lenders compete for your business

Explore all options when approaching private capital markets. Let both bank and non-bank lenders have the opportunity to compete for your business. You can craft financing alternatives to meet your company’s specific financial and commercial goals.

It is important to determine the type of deal that is best for you. Types of debt capital to consider include:

  • senior revolving credit facilities
  • term loans
  • mezzanine securities (instruments that are subordinate to senior debt)
  • unitranche facilities (which provide senior and subordinate debt in one instrument)
  • asset-based or cash-flow facilities
  • unique structured facilities (debt repaid through a specific contract or asset’s cash flow)

The solution for your company may come from a bank, or they may take part in the deal. It’s also possible that one or several non-bank lenders provide the best opportunity. Determining the optimal alternative structures and allowing the market to compete for the deal is the best way to obtain the most advantageous result.

Tip 4: Hire a professional

Accessing private capital markets doesn’t require genius, but it does require guidance from professionals. Professionals can help you to:

  • Analyze your commercial and financial needs and craft alternatives to raise capital
  • Group lenders into several categories
  • Create a competitive process for potential capital providers
  • Negotiate the best possible rates, terms, covenants and amortization schedules

The key is not to over-leverage your company, which puts it and your personal wealth at risk. Rather, your goal is to mitigate risk by getting money out of your company to balance your risk. You can also invest capital in organic growth that will yield an ROI of more than twice your borrowing costs. Or, allow family members or management to buy into your business to stabilize it for the long term.

Category: Capital / Cash Management

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Mark Taffet About the Author: Mark Taffet

Mark Taffet is CEO of Mast Advisors, Inc., an M&A and strategic advisory firm focused on maximizing value for middle market companies. Taffet provides capital raising services through an affiliation with SPP Capital Partners, an investme…

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