Despite the economic uncertainty, many companies are looking to grow their operations and assets. Whether through organic growth, or by acquisition, business leaders should carefully consider their growth finance options.
There is money for the right deals
Despite the negative economic indicators, and all round pessimism, it remains fairly easy to attract funding from the market. The key is to know what funders are looking for in a deal.
At the moment, funds are looking at particular sectors to invest in and renewable energy is a hot one right now. They are also interested in businesses which can create jobs and assist in the growth of small business. Essentially they are looking for positive stories, which are good for their business, and also good for the economy.
Banks on the other hand, like to fund growth because they enjoy more transactions and fees as a result of the relationship.
Make no mistake, the asset managers, credit funds and private lenders are also interested in ways to fund growth, however they tend to be cash flow lenders.
They don’t require the same level of surety, choosing to focus on sustainable cash flows and covenants rather than tangible security. They are not interested in the transactional business in the same way banks are and are happy to co-fund deals with banks.
Matching finance to growth
As your business grows and matures, your funding needs change. The need for flexible finance becomes critical, most especially when it comes to funding growth.
If you are looking to grow organically, but want to achieve this quickly, you need access to longer-term finance. Moreover, the prospect of paying back capital on a loan is not attractive and it makes sense to avoid amortising loans. Interest-only and ‘bullet’ loans (where the payment of the entire principle and sometimes the interest is due at the end of the loan term) are solid options to consider.
Acquisitions on the other hand can be more complicated. While there is also money available to fund acquisitions, you should prepare for a lot more work and due diligence and remain mindful of the timing of the deal.
It’s also important to realise that some funders may require equity in the transaction depending on the perceived risk in the deal. In situations such as these, it may be better to rather pay a higher interest rate on your finance, or negotiate that when certain covenant levels have been met, your interest rate decreases. It’s important to remember, though, that giving away equity to a funder is the most expensive form of debt you can get.
Many people still sing the praises of cash deals. Of course if you are able to pay cash on a deal it’s cleaner and simpler, but remember that you are using equity from your reserves and your return on equity will be lower.
I would recommend a balance of using your own money and debt finance. In this, you will need the correct gearing levels to get the best result for your business.
In commercial property in this market, for instance, a good, conservative ratio is one third owners equity, and two thirds from the bank – this will result in the cheapest rate. Gearing up to 90 percent is achievable and your return on equity will be good (since you didn’t put much equity into the deal), but your risk will increase quite significantly in this scenario.
Know what you don’t know
It is important to have the right help when structuring an acquisition. Work with your accountant and tax expert as well as your legal advisor. They have experience in this and can make sure you have covered every angle when assessing and structuring the deal.
Be aware that you will need a professional valuation of the business or property and it’s imperative to ensure you have met all the necessary compliance requirements. Only once this ground has been covered, should you begin to look at the most appropriate way to finance your deal.
Business owners often underestimate how long the process can be. What’s more they are often completely unaware that there are upwards of 60 companies out there that will finance businesses looking to grow. More often than not, they will simply reach out to the big four banks without looking for an organisation which can give them access to the myriad of financing opportunities out there.
Related: How To Find Funding in South Africa
It’s imperative that you fully understand all your options when it comes to financing a deal. Use an independent financing company who can help source the best deals and the best terms. They will give you an idea of the options as well as how to mix your solution to include short-term, long-term and structured debt.
An independent lending company will also be in a position to mix and match your growth finance institutions and products since they have working relationships with the banks (both big and small), the credit funds, the asset managers as well as select private funders – and are not beholden to any of them.
There is no doubt that the current local and global climate is contributing to an uptick in the number of businesses and assets being sold. This results in some excellent opportunities and business owners should be ready to take advantage of them. The trick however, is to make sure you grow your business in a way which exposes you to the least amount of risk. This requires you to understand your options and making sure you have a team of advisors who can guide you through the process.