Choosing the right debt financing option to fund your company’s growth

This is an exciting time for companies that weathered the recent economic downturn and are ready to grow. Many of these businesses are now looking to expand. For companies in this position, there are financing tools that are capable of supporting business growth. Utilize the right one and it could become a cornerstone of success.

“No magic formula exists for choosing the right funding tool for your company,” says Matthew Cannan, Managing Director, Debt Capital Markets, Fifth Third Bank. “The best solution will be based on your business’s capital structure, your current situation and your needs.” That’s why he suggests that companies should begin looking to their financial institution for support when long-term financing is needed.

Smart Business spoke with Cannan about a few capital-raising tools companies should consider as economic conditions create an environment in which many can turn from defense to offense.

How can companies benefit from issuing bonds and what are the trade-offs?

Issuing bonds is a good option for many larger public or private companies that typically need capital over an extended period but don’t want to repay until maturity. One caveat of issuing corporate bonds is that the company must make its financial details available to bondholders through regulatory filings. But for a company looking for a lot of money on fairly generous terms, this debt market is one that ought to be considered. Most corporate bonds are bought by institutional investors and held for five- to 10-year terms at fixed interest rates.

What are the benefits of raising capital via a private placement and how does it differ from public bonds?

For a private company not interested in divulging its financial details to the public, private placement makes more sense. Insurance companies tend to be the principal investors in private placement bonds because they need to generate returns on their customers’ premiums so they can make good on their insurance contracts. Like public bonds, the terms are in the five- to 10-year range with fixed rates, though there are some floating-rate bonds available. In this instance, companies are generally dealing with one investor or very few insurance company investors in a credit-only relationship.

How are financial assets securitized and how can companies use them as a mechanism for growth?

Akin to the smaller-company strategy of factoring accounts receivable, securitization allows larger companies to monetize assets — e.g., account receivables, loans or leases — that they are holding on their balance sheets. The money is most often used to fund ongoing operations and the arrangements usually last three to seven years. There are upfront fees with securitization, but borrowing rates tend to be lower than typical bank rates because of structural enhancements. As an example, credit card companies use securitization markets a lot because their primary assets are customers’ receivables.

The process, however, is more complicated than straight factoring — an arrangement in which a bank purchases the book debts of a company and pays the money to the company against receivables. Securitization involves taking a company’s financial assets and isolating them via a sale to a newly formed bankruptcy remote affiliated entity and then pledging those assets from that entity to a bank, group of banks or institutional investors via the term asset-back bond market. The intermediate entity is used by lenders to isolate the assets from bankruptcy risks in case the company declares bankruptcy. Securitization is a highly structured arrangement that requires a fair amount of time and thought up front.

It’s important to talk with a trusted financial adviser to select the funding tool that will have the greatest benefit to your company. Some of these methods can be complicated to execute. Having someone with experience on your side throughout the process will mitigate risk while creating the best opportunity to maximize value.

Fifth Third Bank. Member FDIC

 

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