Finding Growth Capital Beyond Traditional Bank Financing

Many business owners are becoming increasingly optimistic about opportunities to grow their companies. However, access to capital remains a significant obstacle. The Pepperdine Private Capital Markets Project highlights this disconnect. Nearly half of surveyed business owners report insufficient financial resources to execute their growth strategies.

Meanwhile, the continuing effects of the financial crisis have changed the financing environment for privately held companies. Approximately 250 banks have failed since the financial crisis began in 2007. Additional failures and tighter lending standards may further restrict traditional credit. Against these conditions, business owners should understand the broader range of capital available to support growth.

Looking Beyond Traditional Bank Financing

Commercial banks remain an important source of financing for established businesses. However, conventional bank debt may not satisfy every company’s capital requirements. Owners may therefore need to consider alternative growth capital.

Potential sources include asset-based lenders, mezzanine funds, private equity firms, venture capital firms, angel investors, and factoring companies. Family and friends may also provide capital in certain circumstances. Each source presents different costs, risks, and requirements.

Debt financing may preserve ownership but creates repayment obligations. Equity financing may provide greater flexibility but requires owners to share ownership and future value.

Match the Financing to the Growth Strategy

Access to capital alone does not make a financing source appropriate. Owners should first determine why they need capital and how the investment will support growth. A manufacturer purchasing equipment may require a different structure than a company pursuing an acquisition. A rapidly growing company may need additional working capital to support increasing sales.

When evaluating alternatives, owners should consider interest rates, repayment terms, collateral requirements, covenants, and potential ownership dilution. Management should also understand how each financing alternative may affect future flexibility.

Use the Private Capital Markets

The Pepperdine Private Capital Markets Project provides valuable information about the changing private capital environment. The research examines banks, private equity firms, venture capital firms, angel investors, factors, and other capital providers. It also examines financing conditions, investment criteria, and the cost of capital across different market segments. For growing companies, this information may help owners evaluate financing sources beyond their traditional banking relationships.

Prepare Before Seeking Capital

Capital providers need a clear explanation of the opportunity before committing funds. Owners should prepare a business plan explaining the company’s strategy, financial performance, growth opportunities, and capital requirements. Financial projections should demonstrate how management intends to use the capital. They should also show the expected effect on revenue, earnings, and cash flow.

Alternative growth capital can provide additional options during a challenging credit environment. The objective is not simply to find available financing. The right financing should provide sufficient capital while supporting the company’s growth strategy, financial capacity, and long-term ownership objectives.