Access to capital has been top issue for business owners for the past two years or more. Tightening credit and reduced liquidity from banks has forced businesses to seek alternate forms of financing.
The following table outlines the array of capital options available to businesses and represents the amount of covenants versus the percentage of cost to the borrower.
- Trade debt will typically be repaid after 60-90 days of aging and will cost the borrower zero percent.
- While senior debt comes with strict covenants, it will only cost the borrower five to eight percent.
- Asset-based debt must be secured with a specific asset such as inventory, accounts receivable or equipment.
- Factoring allows the borrower to sell its invoices or aged accounts receivable to a factor in exchange for 75 – 85 percent of the value.
- With subordinated debt, the subordinated lender may wish to collateralize specific business assets or guarantees.
- Mezzanine debt is the tranche between debt and equity and may include deferred interest, warrants or other lender incentives.
- Institutional equity is typically available to companies poised for high growth.
- Venture capital will be common with early stage companies poised for high growth.
- Angel capital is typical of early stage companies with philanthropy-focused investors and will cost the borrower 100 percent or more.
At every stage of a business cycle, shareholders, managers and executives must pay close attention to the effectiveness and efficiency of the capital stack. Understanding the options available is a critical first step.