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When the bank says “no” to acquisition plans, it's time to turn to non-traditional financing

by Mark Borkowski

In the business of investment banking we are exposed to many difficult situations that business owners may face. Sometimes our client's need for financing is driven by an unexpected business or sector slowdown, other times it is for acquisition or growth purposes. But more often than you might think, a need for capital will arise as a result of a breakdown of existing credit facilities through no real fault of the borrower.

Barry O'Neill, managing partner, Zed Financial Partners, says sometimes businesses get "blindsided by their traditional financial partners" and through no fault of their own, suddenly have a loan called.

"A business owner can have a long-standing relationship (along with shining credit rating and excellent margins) with a traditional lender and still find his loan called, or \'no-brainer\' requests for further capital declined. Changing market conditions, concerns around exposure to industry sectors and risk management strategies can change a traditional lender's interest in a client and the effects can be devastating."

But there are steps business owners can take to go on the "offensive" and secure the liquidity they need to grow outside of traditional financing sources. Business owners and managers must learn to become as creative and versed in options for financing their businesses as they are in other facets of operations.

Sometimes it is a matter of looking for another financial institution that better understands the business. Other times, it requires re-examining the assets of a company from a different perspective. Alternative or non-traditional financing options can help to facilitate the execution of business plans.

Often, access to the appropriate financing may solve liquidity problems or even present hidden and creative opportunities for freeing up cash flow. Several unique structures may be employed to ensure a successful transaction and to maximize the availability of funds. Knowing where to find the different types of financing is crucial. 

Barry O'Neill suggests a few options.

$The US Option:An increasingly viable option for Canadian businesses is US private equity and private debt lenders. In Canada there are a limited number of such sources of capital available, but in the US, there are hundreds of different institutions that are actively seeking opportunities in Canada. Because of the vast amounts of money available south of the border and a limited number of transactions, many of these financial institutions are looking for opportunities outside the US. There are numerous funds that specialize in specific industries. Understanding industries allows them to better assess the risks and rewards associated with the financing, resulting in a better financial partner. As a result, there is growing demand for more creative financial structuring to solve liquidity issues. Companies seeking US funding should work with financiers who understand the industry sector and business, so they can work with the company as it changes and grows.

$ Getting Creative: The key to securing capital is presenting value where others don't and then translating that value into a workable solution for a lender. There are many ways to put financing together. It's a matter of being creative and knowing where the money is. Some examples of different vehicles for creative financing that we've secured through non-traditional sources include equity or quasi equity partners. A strategic financial partner who understands the business and industry can provide the appropriate financial structure to take the company forward. These partners typically bring cash injections to relieve immediate problems and supply sufficient liquidity to take the company forward and often times are critical to the future viability of a company. Private equity partners can be important tools in situations where owners want to retire or semi-retire and transition the company to family or a management group but wish to extract some wealth from the business. 

Here are other creative approaches:

$ refinancing a subordinated debt: Strategies include: purchasing the debt at a discount; converting debt to equity; exchanging the debt for future royalty payments tied to revenue or cash flow; or moving the debt off-balance sheet. 

$ Cash flow management: In many cases, there is significant capital being tied up in working capital. Operational specialists can help to assess cash flow restrictions and assist companies to unlock liquidity by putting in proper controls and systems.

$ Securing of future cash flow streams:Cash flow streams that are associated with long-term contracts and a high degree of certainty may be sold to a third party.

$ sales leaseback: Land and/or buildings can be sold to certain lenders at market value or greater using long-term sales leaseback agreements. In this case, the financier relies on the company's business plan and future cash flows to support future payments.

$ Refinancing "depreciated" assets: Specific machinery and equipment within a company may have little or no collateral value to traditional lenders. Other lenders, such as appraisal or auction companies, may attach value to these assets that allow other financiers to loan against them regardless of whether they have been fully depreciated.

$ Intangible assets: Many companies find that intangible assets (i.e. patents, trademarks) carry little or no collateral value to traditional lenders. However, some non-traditional lenders will lend against such assets. In fact, there are firms that will attach a value to intangible assets and guarantee that value to lenders.

$ Tax structures: Off-balance sheet structures may generate additional liquidity. For example, intellectual property may be sold into a separate company, which reverts back to the "parent" company after a period of time. 

In many cases for Canadian businesses, banks and traditional sources of funding are the ideal financial partners. However, for businesses in periods of transition, the traditional lenders can be impediments and obstacles. There are numerous other options available to Canadian businesses and with a little research, business owners can unlock new possibilities that suit their situation and best serve their needs. SMT

Mark Borkowski is president of Mercantile Mergers & Acquisitions Corp.  

Barry O'Neill is managing partner of Zed Financial Partners 

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