Firms inevitably need capital to grow and sustain operations, Mid-America Growth & Capital has helped many companies source different types of capital. Capital sources are varied and more widely available than management teams often realize. Contrary to perception, sourcing capital is not very difficult. But sourcing the right capital and the proper proportions of it requires a concerted effort.
Business capital is priced, in part, based upon perceived risk. If a lender or investor has a choice to provide capital to a 75 year old business that manufactures car parts as well as a 4 year old telecom start-up, the cost will likely be higher for the younger, “riskier” business. Our team will carefully walk management teams through several evaluations to reduce various risks in a business—this promotes a lower cost of capital.
While firms focus on finding one or more types of capital, the team specializes in advising on and sourcing the component types of capital for a firm’s planned capital structure. Often a firm needs help finding capital from traditional sources (e.g. banks, specialized lenders) but Jared and his team also have the expertise to raise capital in the form of private placement offerings (a small offering of securities to a targeted population of capital providers). Our team helps management teams create and deploy a capital plan that finds all the stratified forms of capital needed.
There is not a single form of capital that is best. Crafting the proper capital structure is a function of industry specifics, operational efficiencies, risk-mitigation and other factors. The true cost (and value) of a particular capital type is not strictly expressed in numbers. One of clearest illustrations of this comes from the typical pairing of equity and requisite board representation, often an equity investor commands board of directors representation as well.
In these scenarios, management teams must evaluate the cost and benefit of an equity stake from Investor A who brings industry experience and influence versus a stake from Investor B who is willing to provide more capital but not much else. Many well-run firms have a variety of capital sources and they leverage the benefits of each according to a capital strategy that is constantly evaluated.
Broadly speaking, most management teams are familiar with the typical features of debt and equity. The advantages of equity and debt financing are worth carefully evaluating for the right mix. Senior debt, often bank loans or lines of credit, are useful for financing growth, equipment and inventory. In recent years there has been a rash of both misinformation and increased regulatory pressure on traditional banking that has contributed to a perceived withdrawal of traditional credit sources. Community banks are fully funded and still lending to well-run firms but they are not a one-stop shop for all financing.
Mid-America Growth & Capital serves as advisors and also capital aggregators, highlighting options and advising on the appropriate capital structure. There are a myriad of hybrid types of capital that incorporate elements of both debt and equity into a single instrument or facility, Preferred equity is a good example of this. Preferred equity often has a regular dividend payment due but is generally less expensive than common equity. There is a class of financing instruments called Convertibles that can take on different forms depending upon event triggers and other imbedded options. Convertibles can provide a way to exchange lower upfront financing costs with greater costs and lower equity ownership later on.
An often overlooked form of capital is Subordinated debt (non-bank, below in priority). Occasionally a firm will face a capitalization need that traditional bank financing can not serve, Sub debt can often fill in the gap. There are a growing number of lenders providing short to medium-term debt with a marginally higher interest rate than Senior-secured bank debt, they are eager to lend and have ample resources. Firms with several sources of capital create a stratified structure that often drives the overall cost of capital lower than simply having all equity or a high concentration of debt.
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