Financing private companies is more difficult than ever due to recent bank failures such as Silicon Valley Bank, tightening credit from all lenders, high interest rates and the potential for an economic recession. Private companies will need to navigate through economic volatility to continue to build business growth strategies that require them to access capital and position themselves for growth.
Let’s review the alternatives for private companies. Public companies have a wide variety of alternatives for financing growth through big banks and Wall Street including esoteric alternatives like derivatives. For private middle market companies, the traditional source of growth capital has been internal capital generation from sales and bank lines of credit.
To grow your business, you will need to mimic public companies in terms of expanding your sources of capital and create a backup plan if your existing sources of capital are unavailable in the future.
The following are 10 capital sources available to private companies. All have different costs, restrictions and availability and all are not created equal but smart company CEOs and CFOs need to be knowledgeable with all.
1. Line of Credit
An agreement between a financial institution, generally a bank, and a company to provide a certain amount of loans on demand to the company. The company may take part of the money at any time over a period of several years. It is also called open-end credit or a revolving line of credit. A line of credit can be called, reduced or not renewed by the bank. This is relatively inexpensive money–but high risk.
2. Term Debt
Usually applies to assets your business is purchasing, such as equipment, buildings, land, or machinery. Scheduled repayment term is fixed and generally extends over more than one year. Lower risk but higher cost.
3. Inventory Financing
A line of credit or loan so a company can purchase products for sale. Those products, or inventory, serve as collateral for the loan if the business cannot repay the loan.
4. Receivables Factoring
A business sells its account receivables (unpaid sales) to a third party at a discount. Typically used for companies that sell products not services.
5. Private Placements
The sale of securities to a relatively small number of select investors as a way of raising capital. Investors are usually large banks, insurance companies and pension funds. Relatively expensive when combined with placement fees.
6. Fixed Asset Financing
Borrowing that is secured by an asset not readily convertible to cash that is used in the normal course of business. Examples include machinery, buildings, and fixtures. Generally lower cost and easy to get as assets secure the debt.
7. Sale-Leaseback
A financial transaction between a bank or investor and a company that sells and leases back a fixed asset over a long-term. The company continues to use the asset but no longer owns it. Generally for fixed assets such as real estate and equipment. More complex than a loan and may present many accounting issues.
8. Small Business Administration Loans
The 7(a) Loan Program, the SBA’s most common loan program, includes financial help for businesses with special requirements such as the purchase of land or buildings, to cover new construction as well as expansion or conversion of existing facilities. The 504 Loan Program provides approved small businesses with long-term, fixed-rate financing used to acquire fixed assets for expansion or modernization.
9. Private Equity
Private equity makes investments directly into private companies. Capital for private equity is raised from retail and institutional investors. Requires giving up equity in and often control over your company to an outsider.
10. The “Hail Mary”
A private company has many internal ways to generate cash and create a “permanent” no interest loan through accounting policies and business practices. For instance, if your competitor pays their suppliers in 45 days and you pay in 30 days, you are leaving money on the table. Conversely, if your payment terms are overly generous or your billing department is not focused on timely billings and collections, you are having to finance cash needs that could be met by better billing and collection efforts.
The year to come looks to be an opportune time to obtain financing to fund your private company’s growth and position your company for the future. CEOs and CFOs will need to be well versed in all aspects of financing alternatives to maximize future growth.
Michael Evans is the Chief Financial Officer and Board Director of Newport LLC based in San Francisco, California. Newport LLC helps CEOs of emerging growth and middle market companies grow faster, improve performance, and prepare their businesses for capital infusion.
Newport LLC clients include private and public companies across multiple industries including technology, healthcare, life sciences, government contracting, manufacturing, energy, education, and professional services. Newport LLC deliver results by serving as seated board members, CEO advisors, and interim or fractional C-Suite executives.
