So, you’ve closed on an M&A deal and you’re going to make this new asset part of your existing organization. Diligence revealed that this addition to your business will support your strategic...Read more »
Growth Company Financing Strategies
Growth Company Financing Strategies
Dave Bosher, Managing Director – Fahrenheit Advisors
High-growth companies, especially ones that rely on high-cost venture or private equity for funding, have the preservation and strategic investment of capital as a top priority. Financing new ventures is a high risk proposition for investors and they seek relatively high returns, or costs of capital, in order to compensate for this risk. Accordingly, high-growth companies typically conserve their high-cost equity capital to fund growth and expansion plans, the hiring of key talent, acquisitions, and other key strategic initiatives. An effective strategy which can lower the company’s effective cost of capital is to fund working capital and fixed asset investments through other lower-cost sources of capital.
Working capital investment, either accounts receivable or inventories, can be financed with either conventional or venture banks utilizing asset-based lines of credit. These asset-based lines of credit represent a self-funding, low-cost source of capital to the growth company focused on preserving high-cost equity capital.
Likewise, most high-growth firms typically also require a significant initial and on-going investment in technology-related assets. These technology assets tend to have shorter useful lives and face high obsolescence factors, requiring the firm to constantly refresh the assets to maintain leading-edge performance. This is where leasing represents a very attractive source of capital for a variety of reasons.
- First, leasing preserves credit lines for the growth company. Arranging technology equipment financing through leases allows the company’s bank credit to be maximized by allowing its lines of credit to be free to finance working capital.
- Secondly, leasing removes trade-in value and residual value risk, particularly with regard to technology-related assets with high obsolescence curves. The residual value of the assets is a risk assumed by the leasing company and provides the lessee the flexibility to re-invest in new replacement assets without being reliant upon the existing manufacturer to realize fair trade-in values.
- Third, leasing eliminates the need for large outlays up-front as purchasing equipment would require. Capital outlays can be spread over a longer period through a lease and conserve high-cost equity capital for growth.
- Finally, leasing represents a complimentary low-cost source of capital. The lease is effectively a fixed-rate loan which carries a cost of capital well below the cost of equity and in-line with bank financing rates.
In summary, strategic financing of different asset classes can be an effective strategy for high-growth companies. Using lower-cost bank and leasing financing can complement and preserve high-cost equity capital to allow these companies to achieve their value creation strategies.
Dave Bosher joined Fahrenheit in 2013 as Managing Director of Fahrenheit Advisors. Dave has had an impressive track record as CFO of several organizations and arguably two of the region’s most successful high growth companies. He believes that the role of Chief Financial Officer goes well beyond taking care of the company finances. He knows it is critical to arm business leaders, boards and investors with the financial data they need for effective decision-making.