Once a business moves beyond the startup phase, the challenge becomes how to finance growth, product development, marketing and geographic expansion.
Thankfully, during this stage of development there are various financing options that can provide non-dilutive and flexible solutions to take your business to the next level.
Many Canadian businesses strive to grow through exporting; however, banks are not always willing to go where the entrepreneur seeks to tread. Export Development Canada (EDC), which is best known for insuring foreign accounts receivable, offers a range of commonly overlooked export financing options to solve this problem:
- Export lending: Did you know EDC lends directly to Canadian exporters? EDC financing manager Vivian Kan said that while banks might lack an overseas presence or have insufficient comfort lending in foreign countries, EDC has extensive overseas networks that can overcome security concerns.
EDC can provide growing exporters a loan, averaging between $1 million and $10 million, over assets in foreign jurisdictions. This is meant to complement a domestic line of credit at rates comparable with the banks. - Export guarantee program: EDC also administers an export guarantee program to provide the bank with a risk share, allowing it to include foreign working capital assets in the borrowing base. These assets include inventory, equipment and even foreign acquisitions. “The guarantee gives the banks the ability to offer a line of credit or term loan to enable your export business to grow,” said Kan.
- Contract bonding: Contract bonding can be used when a company enters export contracts and receives milestone payments that require a performance bond or guarantee to ensure the delivery of the end product or service.
EDC offers an unconditional and irrevocable guarantee to the bank to backstop a standby letter of credit to the customer. This can help free up resources to focus on servicing the next customer.
Sometimes called subordinated debt, mezzanine finance is a term debt companies use to increase their cash flow and business valuation. It’s advantageous for companies that have a real and compelling expansion initiative but don’t have capital.
For companies that are in strong growth mode, mezzanine financing can be the best option next to the senior debt. If you expect the investment to generate a high return, mezzanine financing can be used to replace equity. It also carries terms of three to seven years and interest rates in the mid-teens.
Mezzanine financing does not require much, if any, ownership dilution and is more patient and forgiving than bank debt.
Growing businesses with working capital assets can leverage the value of their accounts receivable or inventory to obtain asset-based lending. This type of lending is ideal for retailers, distributors, wholesalers and manufacturers or any industry that is not contract or performance risk-based.
According to RBC Capital Markets director Wayne Fraser, “Instead of lending primarily on covenants or the balance sheet, asset-based lending focuses on asset value. This flexible model enables layering of the capital structure as well as a higher lending capacity.”
Lending is determined by the assets’ underlying value during a due diligence phase where the value is verified through field exams and appraisals. Borrowing costs range from 3% to 6%, depending on the value of the assets and the credit worthiness of the borrower, and businesses can expect to leverage 85% to 90% of the value of the assets. It’s best used for companies needing more than $3 million in borrowing.
Asset-based lending can be used as a quasi-replacement for equity that can help to scale a business faster than traditional lending would allow.
The growth stage is exciting and highly rewarding for entrepreneurs but needs the right financial partner to provide this key resource. Choosing the right type of capital, as well as a partner that is onside with your strategy and aligned in values, is a key to success.
This column is the second in a series on financing options for stages of business. The next instalment will discuss sources of capital for mergers and acquisitions. Part 1 (“Financing your startup beyond family, friends and fools”) appeared in issue 1279; May 6–12). •
