Damon Walford, Chief Development Officer at alternative lending industry pioneers, ThinCats, shares his thoughts with Finance Monthly on how SMEs can get the right mix when it comes to funding.
Alternative funding offers access to finance that ticks many boxes; from faster turnaround times, to flexible rates and a more in depth probing of the story behind the application. It also provides an ideal avenue to supplement private equity, venture capital, Angel investors and crowdfunders.
Alternative loans for business are more accessible when equity is part of the mix, especially in cases of business acquisition, refinancing and property development. Lenders like to see an element of entrepreneur equity as “skin in the game”, but there is an important place for 3rd party equity which may be on a different scale to that of the entrepreneur, providing meaningful impact on the risk profile of any loan.
Where appropriate an equity and term loan mix will:
- Reduce risk of the debt provider as any security available is against a smaller loan;
- Reduce funds required to service debt;
- Provide all financers with additional comfort regarding the proposition;
- Generally reduce costs of both debt and equity finance due to decreased risk.
ThinCats has huge experience in this area, and has successfully financed a range of projects where a mix of funding has provided the ideal solution. In one case, an MBO team wishing to acquire a business with justifiably high goodwill had their own equity but there was still a funding gap. This is often covered by a deferral of part of the purchase price, but in this case 3rd party equity was the best solution.
Where a sound business may have suffered a financial shock, e.g. bad debt, an equity mix can be the saviour. ThinCats has funded just such a company, where the balance sheet value needed reinstating with equity, but a cashflow-based term loan was also appropriate given underlying trade. In this case, it was impossible to finance wholly on debt, too expensive purely through equity, but very viable to provide the mix.
A property developer had a project ambition that they couldn’t fully fund through their own resources or with the highest Loan to Value debt commercially available. 3rd party equity was used to bridge the gap providing a structured debt & equity solution.
Most deals of any size will have an element of equity and debt in them, often provided by the entrepreneur, but 3rd party equity is key to getting certain deals financed.