There are a large range of equity and debt providers in the current marketplace which did not exist 10 years ago. Each has a varied offering and approach. They can cover small micro loans to large equity stakes and non-bank lending, and some providers request a high degree of involvement in the business versus others that come with a light touch.
The key change in the marketplace is the shift of focus of the funders. They are much less interested in funding the assets of a business; their focus now is on strong business fundamentals. Demonstrating strong management and predictable existing cash flows in a business which can be scaled up through finance is the most attractive proposition. Strong financial reporting systems and finance personnel are also key to a successful proposition.
In recent years government agencies such as NAMA and SBCI, have been working to stimulate the private equity landscape. Whilst SBCI are currently helping underwrite the banking sector’s COVID-led loans, they have been active for quite a number of years in co-investing in a range of private equity funds. Typically, they invest one third with the equity fund raising the balance privately. This has released a considerable level of new money for fuelling business growth.
Another important change to the finance landscape is that the cost of funding over last 10 years has dropped. This has been driven in part by ECB rules, which are aimed at driving capital towards productive investment. Interest rates have dropped and the rate of return investors require has also reduced. It is hard to be specific here as each lender has different criteria, but the general trend is downward and overall would be below bank rates in the mid-noughties.
What hasn’t changed significantly is traditional business operational asset financing, namely motor vehicles, equipment, and debtors. The only real change is that there are more avenues or channels available through manufacturer finance, crowd funding and micro loans, and certain credit unions.
Finance for building development and land acquisition has switched largely to specialist providers through equity and high coupon loans with banks only providing a limited secure amount. This is evidenced in the amount of pre-sales of apartment blocks to REITs and the emergence of house builders raising equity.
Nursing homes, pubs, hotels, medical centres follow a relatively predicable finance structure with many established funders and buyers.
Start-up funding is a separate area. With little or no sales and high R&D budgets, these businesses are typically financed through a series of funding rounds, starting with family and friends, before progressing to angel investors and then onto specialist equity funds. Enterprise Ireland can typically co-fund alongside these investors. Ultimate success leads to a trade sale or refinancing longer term with a fund.
Within individual businesses we have seen a shift in demand for funding driven largely by a changed economy. With a more service-led economy, greater business profitability and better credit management, we have seen a lower demand for traditional funding.
There are no absolutes in the above but as a rule of thumb if the Debt / EBITDA ratio is rising above three times, then you are most likely moving into some more expensive debt and may need to look at an element of equity.
Similarly, if there is not a clear surplus between earnings and the debt repayment (DSCR), then you may need to sacrifice equity or face a higher cost to the finance you need to raise or look for special conditions such as interest only or interest deferred. Bear in mind that more debt equals more risk to the owners and the business so it is important to strike the right balance.
A concern for many privately held business owners is the level of involvement required by non-banking providers. Styles vary from one provider to the next, so a relationship built on mutual trust is critical. Our experience is that these engagements are largely positive. Finance providers want to ensure the business plan is delivered and they will look for ways to help in that delivery, but they do not want to get involved in day-to-day business decisions. Care should be taken to select funders who understand the business and can work with your team. You should look for supportive, strategic and long-term engagement built on shared goals and an agreed exit strategy.
Crowe’s debt advisory team has a well-established track record of helping SMEs secure funding lines. With independent advice from experts who understand your business, we can help you access the right funding options. Contact a member of our team today to discuss your options.
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