Financing Growth Series - Part 2

In the first part of this Financing Growth series of articles, we began by observing that many businesses share a common risk...access to capital. Lenders' and investors' appetites have change and many business owners and executives are left wondering "how do I finance my company and who can I depend on?" In this article, we will explore alternate ways to back-stop or replenish permanent working capital for emerging growth and middle-market businesses. As in most recessions, the pull-back in demand has resulted in decreased sales...leading to operating losses or minimal profits. Losses usually erode working capital, and if not addressed quickly, they can lead to a company being in a precarious position.

Permanent working capital is the base capital used to fund core operations; this is different than short-term or cyclical capital needed to bridge a project, orders or few high growth months. The first step is to determine how much permanent capital is required. This is done by forecasting the financial performance of the company for several years...then evaluating the basic financial metrics of your type business and how they compare to industry benchmarks. It is likely that part of the need for capital can be satisfied with short-term funding and a portion may require permanent capital.

Depending upon how much equity is in your business, you may be able to obtain permanent capital in the form of a term loan. These loans are payable like a home mortgage with principle and interest paid monthly over three to five years. With an SBA guarantee, you may be able to get funding for as long as seven years. The SBA's 7(a) program is very popular at this time and being funded by commercial banks and some non-bank lenders (i.e. UPS Capital and CIT). Another type of debt that can be used to create long-term capital is a lease. Even with existing equipment, some leasing companies will purchase existing equipment and lease it back to your company...freeing the existing capital for use in current cash flow.

If your company is already significantly leveraged, you may require additional equity. The obvious approach is a capital called from existing investors or to recruit new investors. A more creative approach is to establish partnerships with key suppliers and/or customers that have a vested interest in your success, and arrange for an equity investment (or a loan that has equity like features).

Obtaining equity from an outside or unrelated party takes time and is expensive. Obtaining debt in today's market also takes time coupled with a strong go-forward plan evidencing your company's viability. We suggest that management be aggressive in controlling cost and managing cash until a clear path exists to fund your capital needs.

This article is written by Kenneth H. Marks, Managing Partner of High Rock Partners located in Raleigh, North Carolina. He is the lead author of the Handbook of Financing Growth published by John Wiley & Sonshttp://www.HandbookofFinancingGrowth.com You can reach him at khmarks@HighRockPartners.com Article Source: http://EzineArticles.com/?expert=Kenneth_Marks