Debt financing can be an effective tool when growing your business, but leaders can be reluctant to pursue it, says Derek T. Almeida, vice president and business line manager for the Capital Finance lending group at Bridge Bank.
“Some businesses are run by their founders and they take pride in not having any debt on their balance sheet,” he says.
“Others don’t realize that they could qualify for debt because they feel they are too early stage or they have talked to people and been told they’re not traditionally bankable because they don’t have enough cash flow. However, there are multiple debt options available that might qualify your business sooner than you think.”
Equity is another option to grow your business, but Almeida says it’s not always the best path to take.
“It can become more expensive from a dilution perspective if you have to raise funds from friends, family or an institutional investor,” he says. “Sometimes you’re able to get bank debt. And even if you need to raise equity down the road, you might be able to push out that need and get a higher valuation so the dilution cost of bringing that capital in later is less.”
Smart Business spoke with Almeida about working with your bank to arrive at the best funding plan for your business.
How should past performance affect a company’s funding strategy?
When your company is on a strong growth trajectory and has tangible evidence to support continued success, you’ll obviously have more funding options on the table. But that doesn’t mean all hope of securing funding is lost if you’ve had a bad quarter, a bad year or even a bad couple of years.
You still need to talk to your bank, meet with potential funding sources including investors, and explore what’s available to help your business. Don’t make assumptions about what you believe banks can do because they can prove to be inaccurate.
When the overall economy is down, business leaders may assume that banks aren’t offering loans or financing to protect their own assets. The fact is, however, that banks can support a quality company with a strong growth plan in place.
And if they don’t believe it’s the right time to move forward with your plan, they can advise you and potentially help you avoid making a costly mistake.
Who should speak to the bank on behalf of your company?
When you provide your bank with more touchpoints and additional perspective about what your company is trying to do, you give it the tools to make a more informed decision as to what you need to achieve your goals.
Your financial team typically knows your company well from a fiscal perspective. If it’s a closely held business, the bank can meet with these leaders as well as the owner and come away with a good sense of where the company is at.
But not all companies operate that way. If it’s a company backed by venture capital or private equity, there may be leaders who aren’t as connected to the day-to-day operations and may be able to answer additional key questions a bank will want to know when you are trying to secure financing.
This dialogue can better familiarize the bank with your business model and either back up your projections or uncover potential flaws in your plan that you can now address collaboratively.
How can a bank help you raise equity?
Many banks can offer support to a company from the time it’s a startup to the period following an initial public offering and beyond. They work with companies that are looking to raise equity and have contacts with various private equity, venture capital and investment banking firms.
The bank can make an introduction to investors that it believes would be a good fit for your business or to an investment banker that can lead the process. A good bank looks beyond the deposit and credit relationship it has with your business and tries to build a partnership with your team to help you make connections and resolve your needs.
Banks can provide financing at multiple stages of a company’s life cycle and if they can’t do a deal for you, they can advise you to when they could and provide you with other options to consider. ●
Insights Banking & Finance is brought to you by Bridge Bank.