We don’t normally use this forum – as Dennis Miller might say, “. . . to get off on a rant here!”
So if this article qualifies as “rant”, please accept our apologies in advance. But here’s the issue:
Whether speaking to prospective clients, bankers, accountants or otherwise, we can’t count all of the times we hear some version of “Well I understand the product, but it’s expensive”.
While we are tempted to ask “Compared to What?”, we understand the obvious inference being the comparison to bank financing.
So we begin with an admission – yes – our financing is more expensive than bank financing. But here is the little secret – we don’t compete with bank capital. If a company can get the capital they need from a bank, then doing so will almost always be their best result.
But if your company is coming off of a year of losses, has materially impaired or very low net worth, needs capital in amounts greater than 4 or so times existing tangible net worth or a combination of the above, then bank financing is not happening for that company.
So let’s move on to all other circumstances – the arena in which our capital is both highly competitive and very valuable.
Compared to equity? Assuming any would be available. How much is 30% of the company worth? How much does it cost to have a partner who might have his/her own ideas about what to do next?
Or compared to the next $1 million of 25% gross margin sales? You know, those orders sitting on the fax machine that can’t be fulfilled because there is not enough working capital to do so? $250,000 of lost gross margin seems pretty expensive to us.
In the end, the variables to consider in understanding if mezzanine / alternative / ABL capital a good deal are only a few. Truth be told, it really comes down to one primary driver – Growth!
If additional capital can be deployed in a manner that generates growth, value is almost sure to be created. It’s the reason why budding entrepreneurs find it sensible to sell 33% of their company to a venture capitalist – and welcome them and all of their brilliant ideas onto their boards. It’s why other entrepreneurs spend years boot strapping their business – doing everything possible to avoid having a partner with a potentially different vision – only to realize that an ABL financing (with no equity strings we should add) even at 12%, 15% or even higher cost makes sense.
There is a parable of old that tells of the man that knew the price of everything and value of nothing.
Every one of our clients grew their businesses materially last year – with the help of our capital. A quite valuable proposition indeed.