Business Adviser

The Devil is in the Details When Financing for Growth

By Shubo Rakhit
Managing Director, KPMG Corporate Finance – KPMG Enterprise, Toronto

With market conditions being what they are, it is more important than ever to ensure you follow all the right steps when seeking financing. Even the most robust of businesses need to ensure they have all the prerequisites in place when speaking to potential lenders.

One of the core fundamentals when private companies are seeking financing for growth is to have a well thought out business plan. Typically financiers ask for both short- and long-term projections. In response you should have details at the ready on what your business will look like in the next 12 months as well as the next five years.

It’s very important in that process to demonstrate solid financial forecasts, including cash flow. Many times companies will put together revenues and expenses and P&L when they start talking about financing for growth. But the cash flow questions will follow. Expect the lender to ask what you are using the proceeds for and what are the projected cash flows from that spend.

On the back of that is the ability to show you have an appropriate capital structure to run your business and more importantly, to manage risk. A good approach is to look at what your peers and comparables are doing in terms of how they are capitalized, and what would be considered acceptable risk. Providing a sense of context for managing business and financial risk is an important piece of information for lenders.

Remember that financial risk can vary considerably depending on the risk profile of the business in question and industry norms. On the personal front, some business owners simply don’t want debt. Others want lots of financial leverage. Leverage availability is also dependent on your industry sector, the types of products or services you sell, and your competitive market position.

During the preparation stage, we strongly advise businesses to conduct a sensitivity analysis to show they have alternative strategies should growth projections not follow the plan. The key question you need to answer your lenders is what is my plan B if there are changes in the growth plan?

Once you have done your planning and compiled your information, the next step is assessing your financing options. The structure of third party financing is largely dependent on three things: equity value, asset value and cash flow strength of your business. Depending on where you fall in that spectrum, it’s prudent to look at the most viable options for maintaining your business, while providing flexibility for growth.

At this juncture, it’s essential to prepare a succinct management presentation of our business. Succinct is the key word here. Keep things to 10 to 20 pages at most. This is a good time to consider working with an advisor to make sure you are reaching out to the most appropriate sources of capital to present your business proposition.

To summarize, the key attributes lenders look at from a debt raising standpoint are:

1) The amount of security (i.e. assets) available

2) The ability of the business to free cash flow to service interest cost and principal repayment

3) A financial covenant structure to ensure financing obligations stay within defined parameters.

4) The cost of financing

While the cost of financing is an important factor, I would argue that structure of financial covenants is equally important. We have seen situations in which financial covenants are so restrictive, businesses have actually ended up being undercapitalized, hampering their ability to grow quickly if at all.

The prospect of seeking out funding for growth can be a daunting one. There have been periods in recent history where funding options have been limited and resources scarce. However, capital availability for the mid-market is improving and borrowing rates continue to be very attractive. As we move forward, banks and alternative lenders are more open to new funding opportunities, which is good news for all.