Debt providers for transactions
At Forward Corporate Finance, we help our clients to sell their business, buy a business, or complete a Management Buyout (or MBO). If we are assisting them with an MBO or an acquisition of another company, then invariably we will be assisting them to raise the finance for the deal.
Most recently we completed the acquisition of March Foods for our client IBC Simply using debt funding from Allica Bank, and the MBO of Praxis42 with debt provided by Triple Point. The funders we used will not sound like traditional high street banks. Not because there is anything wrong with the traditional clearing banks, but because they are often not best suited to leveraged transactions in the SME market.
In this short article I will focus on debt funding in the £1m to £10m range, both deals mentioned obtained debt funding in this range with our assistance.
Starting simply…money is beginning to have a value again. When I was born, the bank of England base rate was 12.5% and exactly 10 months later, it soared to 17.0%… hopefully the events weren’t correlated!
Between the 5th of March 2009 and the 4th of May 2022, just over 13 years, the bank of England base rate was less than 1% and this is my comparison period where money didn’t have a value? Bear with me…
This period was tumultuous for the mainstream banks, who as a result have focussed their deployment of capital in (perceived) less risky areas. So unless you have a property in your business, trade debtors due to pay you, or an unwavering confidence in your plans that means you are happy to sign a personal guarantee to the bank for the money you are borrowing, your bank manager is unlikely to find the funding you need for your MBO or acquisition in the £1m to £10m range.
As a result new entrants have focussed on this underserved market and now have a vast array of products available for the right deals. They take the simple view that different types of lending have different risks, so if it’s a higher risk loan they will charge a little more interest. But what this means is that rather than finding a way to say no, they try and find a way to say yes. And in most deals it’s not the interest rate that kills the deal, it’s the size of the loan available. These alternatives can roughly grouped into three types of loans from lowest to highest risk:
- Asset based loans – these companies look at your assets as things they can lend against, usually property, trade debtors, and sometimes stock or plant and machinery.
- Cashflow loans – if you have no assets, don’t despair, these companies look to understand your cashflows. If you have stable, predictable cash generation, they will aim to lend against these.
- Mezzanine loans – these companies will again look at your cashflow, but are focused on growth and whether you can repay the loan in the future. These are the riskiest loans and the most expensive but a great solution for a faster growing company, and still less expensive that securing an equity investor.
Some lenders will mix and match the above to try and find a solution that works, such as an asset-backed loan with a cashflow top up.
So whether you have assets or not, predictable cash flows or not, growth ambitions or not, there may be a funder in the market that we know, who will suit your transaction. If you need help finding them, we can help you!