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How to Decide on a Funding Source to Grow Your Company
All business owners need capital to launch, grow, acquire, and reinvest in their company. There are multiple sources of capital and each has its own pros and cons.
Small Business Administration lending is a good source for those with the stamina to go through the process. These loans are guaranteed by the government and there are banks that specialize in SBA lending. I recommend working with an SBA specialist since they can best navigate the process and will increase your odds of receiving a loan.
Traditional credit facilities will provide your company letters of credit to draw down funds as you need them. If you have positive EBITDA (Earnings Before Income Taxes Depreciation and Amortization), banks offer limits from one to three times your EBITDA at relatively reasonable terms. Today that’s around four to five percent interest with five to seven year amortization schedules.
Mezzanine debt is provided above the levels banks do and are considered more risky for the lender so the interest rates charged are substantially higher. Those rates can be eight to twelve percent, or higher, depending on how leveraged the company is. I don’t recommend this type of debt unless it’s tied to an acquisition with tremendous synergy and profitably to absorb the debt terms. This is also the note you will want to ensure has no pre-payment penalty and is targeted to be paid off first.
Private Equity is beginning to expand its reach downward into smaller organizations previously deemed unattractive based on size. Many PE firms will now look at smaller organizations to diversify their portfolios or to merge into larger established businesses. Depending on your industry these folks might be your best bet as many firms have connections that can benefit your business. Think about Shark Tank and how the sharks’ connections can help accelerate small company growth. If a PE firm is focused on your industry it can provide substantial lift through its connections, the capital it provides, and through the advice it can offer.
Take the company public with your own IPO. This is usually a difficult hurdle for most small companies to execute. The regulatory expenses and knowledge needed will dilute current earnings and ability to focus on the business. Don’t go down this path unless you can achieve substantially better growth, margins, and valuation from an IPO. Also consider going through a pre-IPO workshop to make sure you know what you are getting into.
Start with the least intrusive, lowest interest rates and highest probability of executable capital if your company is at an inflection point needing additional capital to expand. These are impactful decisions to make and none should be taken lightly, so choose what will work best for your company.
Richard “Gordy” Bunch is the 2015 EY Entrepreneur of the Year for the Gulf Coast for Products and Services. Submit suggested topics for future business columns to gordy@twfg.com
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