19 Jan 2018 | 03.05 pm
Understanding The Right Finance Options
Advice from John Bowe of Mazars
19 Jan 2018 | 03.05 pm
The Irish market today has probably more providers of finance and equity active than at any time over the last 10 years. Sources include traditional banking products (term debt, invoice discounting, finance leasing), and alternative debt providers and equity providers (Private Equity, Employment and Investment Incentive Scheme Funds, Angel Investors and High Net Worth Individuals).
Understanding the right finance options for your growth plan is really important, and aligning your funding sources to their uses will ensure you don’t put the cashflows 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.
The 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%, plus 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 and 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% to 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 business 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 investors are not managers, they will want a seat on the company board, so it is important to pick the partner who is a fit for you. Some of the Irish funds active in the Irish market include Carlyle Cardinal Ireland, MML, Development Capital, Broadlake, Renatus, CauseWay Capital, LionCourt, FL Partners and BGF.
While financing options are available, if you 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 your business.
• John Bowe is Partner at Mazars Corporate Finance Ireland.