As a company grows and experiences success, 
additional capital is often required for expansion or acquisition. In searching ways for raising capital, middle market companies have to consider a number of elements that determine the nature of the loan. This includes factors such as cost of funds, level of availability of capital, degree of risk assumed by the lender, level of documentation required, timing of the transaction and the term of the loan.
Listed below are a few avenues that middle market companies can consider while raising capital.
Factoring
Raising capital through factoring involves the assignment of accounts receivable in exchange for immediate cash. This can be as high as 90% (or sometimes even higher) of the face amount of the receivables and is usually calculated depending on A/R quality and size. Advantages of factoring include very modest documentation and ease of closing. Disadvantages are the cost of funds which can run into the 20% range and limited funded amount.
Bank Debt
The most familiar of all forms of capital, bank debt is a line of credit from a commercial bank. Although unsecured lending is sometimes made available to financially strong customers, bank debt is generally secured by all of the assets of the company. Since banks typically look for a minimum of a five-year operating history with the most recent years on a profitable level, it is suited for well-established middle market companies. Banks are very selective and bank debt is not easy to secure. The advantages of bank debt are its low cost. Its disadvantages include short term and need for a personal guarantee.
Asset-Based Lending
Asset-based lending (ABL) as the name suggests provides a line of credit financing secured by a company’s assets. Generally, ABL provides advance rates of up to 85% on accounts receivable and 60% on inventory. Some lenders also provide funds against capital assets, with advance rates governed by asset quality.With asset-based lending, documentation and due diligence is typically more involved than with factoring, and it can take three to six weeks to finalize the deal. Asset based lending is suited for companies that have some blemishes in their historical financials. The advantage of asset based lending is that they will more readily provide capital vs. a bank. The disadvantage is the cost of funds and the limited amount provided at closing.
Mezzanine or Subordinated Debt
In simple terms,mezzanine or subordinated debt is basically cash flow lending without a first lien against the company’s assets. Impacted by the amount of senior secured debt, ‘meza-debt’ offers borrowing levels that can range as high as four times as cash flow, thereby making it most suitable for acquisitions and growth capital. Also since subordinated debt is more expensive than straight debt but less costly than equity, mezzanine financing is usually utilized in combination with debt and/or equity for a blended overall cost of funds.
In the current economic scenario, raising capital is all about exploring alternatives and wisely assessing the best financial structure suited to your business. By leveraging its network of over 100 capital providers, Attract Capital has assisted a wide variety of companies successfully in raising capital. The firm provides sound advice on the best possible acquisition and expansion funding structures available in the market.
Contact us now to set up a free consultation with our experts.