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Enable Growth by Borrowing the Right Way

When it comes to scaling a business, there is no manual or step-by-step process that anyone can just pick up and follow. Industries vary, reacting differently to evolving economic conditions; the same goes for geographic markets.

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That variability, however, points to an important piece in the business growth puzzle, one that all decision-makers should keep in mind: capital and lending strategies must be tailored to individual business needs.

Scaling up often entails funding multiple elements unique to a business’ goals, such as new warehouse space, heavy equipment additions, expanded IT infrastructure, new vendor contracts or workforce increases. Relying on the same products or leveraging too heavily with a single lender to pay for those items can prove costly and hinder growth in the long term. But consultation with financial professionals can illuminate how to borrow the right way.

Borrowing strategies and products to consider for scaling small- or medium-sized business:

  • SENIOR DEBT: This is a firm’s highest priority debt, normally secured with a lien against a form of collateral, and it is the debt a business must pay off first if it enters bankruptcy. The primary advantage is the debt usually has a lower interest rate and carries less risk, which lenders also appreciate.
  • MEZZANINE FINANCING: As a more flexible product, mezzanine financing may be perfect for an established company looking to fund a project with a short or medium time frame, such as an acquisition, buyout or ownership transition, or expansion, or for a company that does not yet qualify for senior debt. As a blend of junior, or subordinated, debt and equity co-investment, mezzanine loans provide funds that are secondary to other forms of lending, so the terms are typically longer than senior debt.
  • SBA LENDING: These loans often are used to get a new venture off the ground, but they also can be leveraged as a business begins to grow. For organizations that qualify, these loans can provide favorable rates and terms to fund acquisitions, expansions, commercial real estate purchases, construction and more.
  • EQUIPMENT FINANCING: Depending on the business, expansion may require new vehicles, heavy machinery or any of the wide range of equipment used to keep operations running smoothly. Specialized equipment loans or leasing programs can bring advantages over traditional forms of borrowing with flexible terms that match specific needs. Leasing, in particular, carries the benefit of freeing up cash by spreading out the cost of expensive equipment and avoiding long-term maintenance costs on equipment that may become obsolete.
  • INTERNATIONAL SOLUTIONS: For businesses expanding operations into foreign markets, rules and financing tools become more complicated. Letters of credit assure creditworthiness when dealing with international sellers, multicurrency loans simplify banking relationships and shield companies from foreign exchange market fluctuations, and certain loans supported by the federal government can help establish overseas subsidiaries.

As these examples highlight, there are right-fit financing solutions for any business in position to scale. Discovering and determining the best tools to make a business’ growth objectives a reality is a challenge, but experienced capital advisors and financing teams will enable organizations to find the path to success.

Considerations for Larger Companies

Larger businesses may still be faced with a tighter-than-normal lending environment for traditional forms of financing. Based on size, credit history, performance, revenue and risk appetite, among other factors, sophisticated businesses may consider alternative strategies, such as bond financing — issuing bonds to investors and repaying them with periodic interest payments until the bond’s maturity date. This form of financing can provide predictability and consistency when used as a long-term, fixed-rate debt instrument.

Another option for larger companies is syndicated lending, a specialized financing instrument that brings together a team, or syndicate, of banks to meet large financing requirements. As each institution provides a portion of the funding, one bank serves as the syndicate agent.

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