SME business finance: Navigating debt and equity sources

SME business financing options

Navigating debt and equity sources

Colm Sheehan, Director, Corporate Finance
SME business finance: Navigating debt and equity sources

Companies require financial resources for various purposes, such as expanding through acquisitions or organic growth, buying real estate, acquiring capital equipment, implementing transformation projects, entering new markets, and numerous other objectives. In this article, we explore the available funding choices for businesses and provide insights into the best practices for obtaining them.

Funding options

Debt finance

The debt market is the most commonly used and a widely available source of finance, particularly for SME businesses. The market can broadly be broken down into two sectors – pillar banks and a growing pool of alternative lenders.

Senior lending is the cheapest form of debt and is typically secured from high street banks. The challenge facing Irish borrowers currently is the lack of depth in this market, with Bank of Ireland, AIB and Permanent TSB being the primary providers for SMEs. It is important that the lending market has the necessary depth to create a level of competitive tension for the benefit of the borrower.

The alternative lending market has grown considerably in Ireland in recent years, with many lenders offering products on an asset-lend or cash flow-lend basis. Loans at this level command a higher interest margin, but typically the risk appetite of the lender tends to follow the elevated pricing. There can be scope for these lenders to provide greater EBITDA leverage at risk-adjusted rates of return.

There is also scope for greater flexibility in terms of structuring a repayment profile with the alternative lenders – they may allow for interest-only periods or bullet capital repayments at the end of a loan’s term.

Equity finance

While the majority of fundraises are through the debt market, raising equity can often be a sound alternative. One would typically see equity being raised to fund a clear growth strategy that enhances the capital value of the business.

There is a growing number of private equity houses operating and wishing deploy capital in the Irish market. Private equity investors will have a clear investment plan and will typically look to realise their investment over a medium-term horizon. As such, a business will need to exhibit real growth during that time, either through organic opportunity or acquisitions.

Private equity investors can often add intangible value to the management of the business. They will act as an advisor and will leverage their experiences in other businesses to provide strategic direction to your business.

Raising equity and selling part of your business can be an emotive decision but can also be the correct route of raising finance, especially where there are growth opportunities for the business that will require short-term cash flow investment to capitalise on.

How to access

The labyrinth of funding options available to businesses can be a challenge to navigate. In some cases, it can be difficult to identify the appropriate person within a bank or lender to open the correct doors for you.

A trusted corporate finance advisor will guide you through that process, from preparing a business plan to present to lenders to ultimately negotiating terms and ensuring an efficient drawdown process.

In terms of preparing for a funding proposal, to provide the best chance of success, it is important to prepare robust and defendable projections to illustrate repayment capacity/future profitability.

This article has also been adapted as part of the recent Irish Times Corporate Finance Special Report.

Crowe's dedicated corporate finance team has a wealth of experience advising clients in business finance. Let Crowe help you maximise your investment.

Naoise Cosgrove, Managing partner - Crowe Ireland
Naoise Cosgrove
Managing Partner
Corporate Finance
Colm Sheehan - Crowe Irelnad
Colm Sheehan
Director, Corporate Finance