Capital Availability: Feast or Famine?

Historically, companies seeking to fund working capital, internal expansion, mergers and acquisitions and other general corporate needs have had many traditional and alternative sources of capital available to them. While certain markets are available only to publicly held, investment grade or companies with at least $15 million in cash flow, most companies have been able to attract capital from one or more of the following sources:

  • Bank and finance companies (including corporate, asset-based, cash flow and structured finance lenders, leasing and factoring companies)
  • Commercial paper market
  • Public debt and equity markets
  • Private equity
  • Mezzanine financing
  • Venture capital

A look at this year’s headlines would certainly lead one to believe that obtaining financing is not a problem in today’s market, absent the recent volatility in the stock market. For example, private equity groups, mezzanine financing sources and venture capital funds are setting fund-raising records again. Start-ups have raised record-breaking amounts and yearly merger-related activity should meet or exceed $1 trillion for the second year in a row. With all these positive signs, one could conclude that it’s possible to raise capital for just about any promising business venture.

This is clearly not the case. Banks and finance companies have tightened their credit standards significantly in recent months and are taking a much closer look at loan-to-collateral values versus lending to companies based upon the strength and consistency of their cash flows. Already scarce, many “cash flow” lenders have returned to their collateral roots, making EBITDA-based credit facilities more expensive and harder to obtain.

Don’t look for the credit floodgates to open any time soon. Lending institutions are becoming increasingly “sponsor sensitive,” meaning they want a private equity group or other deep-pocketed source to fund their borrower should things go awry. The recent rash of bank mergers has also reduced the number of quality senior lending sources. Combine this trend with a closed high yield market, a volatile public equity market, and ever-larger private equity and mezzanine funds, and any deal could have a tough time getting done.

Amid this doom and gloom, how do you get your deal done? For starters, there is no substitute for a great management team. Know your business, market, competitors and business plan cold. Be prepared to sell through your weaknesses and use them to create future opportunities. Leverage your time. Take advantage of your legal, accounting and financial advisors. The last thing you need is a drop in operating performance weeks from closing. To maximize your chance of success in attracting capital, be relentless in making your deal happen.