Amongst historical levels of uncertainty, it can be very difficult to know when it is “ok” to grow your business. Some businesses, as we have discussed, are in such high demand that they can’t help but grow. Others are simply well-positioned to weather the current situation and move forward with existing strategic plans. From our position, we are seeing companies succeed in securing debt, though the process looks a little different than usual.
Which companies are successfully securing debt?
The fundamentals of securing debt have not changed. You still need a good story, a strong strategic plan, and a relationship with the people and institutions providing the debt. In a recent roundtable, Axial points out several other characteristics of companies that are able to secure funding:
- They have a compelling “story” of why they need funding, most likely some issue that needs to be addressed
- They have a “during COVID” and/or “post-COVID” plans that address the next four to six months, providing realistic projections
- They will be able to pay back any deferrals in interest taken to weather the initial storm when COVID-19 hit
Even if your company can check all three of the boxes above, it still comes down to people. If your lender can observe how your organization is reacting to COIVD-19, then they will feel more comfortable closing. Being within driving distance is a big part of that in many situations.
Recently, Symmetrical Advisory was proud to work with Azzur Group, LLC to determine the optimal capital structure required to achieve the company’s growth strategy, while also facilitating introductions to strategically chosen lending institutions. Our goal was to help the company obtain the lowest cost of capital and most favorable terms possible during these times. Azzur Group provides life sciences companies with consulting, facility solutions, engineering, validation, IT, technical, training, and laboratory services from Discovery to DeliveryTM. Its newest offering, Cleanrooms on Demand (CODs), provides flexible and scalable facilities for early phase product development. Due to increased demand for CODs, leadership rightly felt they had a compelling story for expanding their credit facilities. We were able to help them secure the debt that will help them to grow.
Which companies are not able to secure debt?
Generally speaking, we’re observing and Axial confirms, that deals with the following characteristics are not likely to close:
- Opportunities with an international element, particularly involving Asia
- Opportunities involving obviously struggling industries, like hospitality or airlines, where things are clearly on hold until there is a vaccine and/or things open up completely
- Opportunities where PPP funding is suddenly secured
Factors to consider
We’re keeping our eye on a lot of different factors that will affect debt financing over the near term.
- Asset-based lenders are still bracing for defaults and are understandably cautious. If defaults do start to come in, expect to see raised rates
- Expectations around interest rates are changing. Interest rates have been low for so long, Axial is reporting that some organizations are still expecting low rates when they ask for funding. But the risk is higher – resulting in higher due diligence costs and higher rates. It is extremely important that small businesses, in particular, have realistic expectations
- Government contractors are in an interesting position. Their customers often have two- or three-year terms in their contracts, which could make them more attractive for many lenders, depending on what government budgets ultimately look like for 2021
- Some small business owners are considering personal loans for emergency funding. There are big drawbacks to this approach, though it can help in a pinch, and we recommend researching your current options for SBA loans first as things change weekly
- Deals are taking a lot longer, mostly due to slower due diligence. We expect to see increased use of outsourced services to support on-site diligence
Finally, organizations with an existing SBA loan likely had payments forgiven for six months and are likely not looking for capital right now. We expect the Q4 and Q1 2021 to be much more active.
If you are considering new opportunities, contact us for a confidential discussion of how to think about and take advantage of possibilities appropriate to your specific situation.