When a company is looking for funding it is important for management to plan in advance to ensure funding requirements can meet needs. It is absolutely key to prepare but it is also important to understand options. Therefore, having knowledge of the funding market should be something that directors and non-executive directors are aware of.
What are the sources of funding in the Irish market?
The Irish market today has probably more funding options with more providers of finance/equity active than at any time over the last 10 years. Some funding options include traditional banking products (term debt, invoice discounting, finance leasing), alternative debt providers and venture/equity providers (private equity, employment and investment incentive scheme funds, angel investor and high net worth individuals). Understanding the right funding options for your growth plan is really important and aligning your funding sources to their uses will ensure you don't put the cash flows of your business under strain as you finance your growth.
If a business qualifies for a bank loan then term debt will be your cheapest source of finance. Banks simply have the cheapest money to loan because of their access to low yielding deposits and money/ bond markets. Corporate banking is certainly open for business while accessing credit from Business Banking is more challenging. Key for a business is to lay out your business plan, your funding requirements and debt repayment capacity in a clear manner. Banks generally lend on a multiple of EBITDA for trading businesses, typically between c. 3.0x – 3.5x EBITDA. That EBITDA will be stress tested by the Banks. Current senior term debt is priced at circa 2.5% - 3%+ with arrangement fees. Bank debt comes with conditions, debt covenants and security arrangements which can reduce flexibility so the T&Cs are important.
Direct Debt Lenders
Direct debt providers are more expensive but are often more flexible than traditional banks and will also offer business owners quicker decisions / access to capital. Debt repayments can be structured to facilitate further capital expenditure requirements and debt availability can be up to 5.0x EBITDA. Pricing varies between providers and deal type with coupons of 6.5% - 15%. Some of those active in direct lending to Irish businesses include Dunport, Broadhaven, Proventus, BMS Finance, Capital Step, Muzinich and Harbert Management Corporation.
Having dedicated Irish private equity funds focused on the Irish market is a very positive occurrence for Ireland. Private equity can be a good option for funding growth (organic or acquisitive) while also allowing owners the opportunity to de-risk their own personal balance sheet, taking some cash off the table. For those considering private equity, it is important to view it more as a partnership rather than just a cash investment. The added benefit is access to the private equity contacts, network, experience and portfolio companies that can really help your business grow. While private equity are not managers they will want a seat on the board so it is important to pick the partner which is a fit for you. Some of the Irish funds active in the Irish market include Carlyle Cardinal, MML, Development Capital, Broadlake, Renatus, CauseWay Capital, LionCourt, FL Partners and BGF.
While financing options are available, if companies are considering a funding process it is important for businesses to be prepared. Picking an adviser who understands the funding market and can outline the options available will help enormously. The more prepared you are the better chance of securing the right deal for the company.
This Blog first appeared on the IoD website November 2017.