Where a company is on its growth journey influences the proportions of debt and equity in its capital stack. In general, early-stage companies have more equity than debt because debt providers may want at least interest payments on a timely schedule whereas equity investors will wait for a return on their capital in exchange for ownership.
Nonetheless, every financing challenge has the potential for a debt solution, and most companies can attract some level of debt funding so long as they have a compelling enough proposition and offering. The providers of that debt, however, are often more diverse than company leaders realise.
To find the most appropriate lender, business leaders need begin by identifying their current investment needs—after all debt tends to be an event-led requirement—and then determining the driver of those needs, such as their strategic plan. Next, they should evaluate the key players in the debt landscape—including both traditional and private lenders (aka alternative lenders). By mapping this landscape and thinking about funding participants in the context of their current business operations, leaders can establish which participants and products they have access to and which of these available options best fits with both their current financing needs and long-term strategic plan.
An Overview of Traditional v. Private Capital Lenders
In general, traditional and private capital lenders will have different risk appetites, so they may evaluate businesses differently and prioritise different criteria when determining whether to extend credit to a candidate. Because of their differing risk models, these funding participants are more attracted to some businesses and types of investments than others.
Traditional lenders such as banks may have lower risk appetite for certain sectors or asset classes than private capital lenders, and they may require a higher level of control as well as interest and principal repayments over the life of the facility. In exchange, the borrower likely gets access to a lower cost of credit than with a private capital lender.
Banks often work repeatedly with the same customer: they operate by participating in lending cycles in which businesses leverage up, pay down and leverage up again. They evaluate a company’s EBITDA (earnings before interest, taxes, depreciation and amortization)—a metric representing the profit generated by a business’s operations and available to service its debts—to determine which lending products to offer and how much debt (often represented as a multiple of EBITDA) to extend. They focus on a candidate’s past performance and the stability and sustainability of its business model when establishing the structure and form of debt financing that they will provide.
On the other hand, private capital lenders such as credit funds or direct lenders focus heavily on a company’s business plan and potential for future success. They have a forward-looking proposition: they expect the business use the loan to deliver its business plan so that in a few years’ time, it will be more valuable and more attractive to other investors or capital providers. Then, they can either exit the investment by refinancing it to a bank or follow on with new investment as the business continues to grow. Private credit funds often loan more multiples of EBITDA than traditional lenders, and they may only mandate interest repayments during the loan, with repayment of the principal being due at end of the tenor. However, they tend to charge higher interest rates since they may take more risk than traditional lenders, making the overall cost of servicing the capital more expensive.
How Grant Thornton Can Help
Our Debt Advisory team works with professional investors and corporate clients, advising on all debt capital markets products locally and globally. We provide trusted expert advice, assisting clients with sourcing, negotiating and structuring new or existing debt.
The team has expertise in various sectors and markets, including bank facilities, debt capital markets, alternative lenders, leveraged finance, asset-based lending, real estate finance, structured finance, non-profits and charities and company-side restructuring finance. The Debt Advisory team is integrated with and works in collaboration with Grant Thornton’s Deal Advisory. The team is also complemented by Grant Thornton’s global debt advisory network and other professionals throughout member firms.
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