Colbeck Capital Management on Strategic Lending as a Financing Option

Finding the right financing is a crucial part of business growth and success. Companies considering an acquisition strategy for growth may feel locked into certain financial options. However, Colbeck Capital Management identifies a flexible and supportive financing solution that is often overlooked: strategic loans.

A strategic loan is not the most popular financing route, but this funding option can offer many benefits in key situations that call for flexibility or involve time-sensitive deals.

What Are Strategic Loans?

Understanding your options before outlining a strategy fosters better decision making for borrowing money for business growth. Many business leaders are only aware of a few options for funding acquisitions such as:

• Available cash or savings

• Traditional bank financing

• Private equity firm partners

While these are some of the most common channels to seek funding, they fail to include strategic lending as an option that can offer even more benefits as a capital source. In fact, strategic loans can often be more helpful for acquisitions than traditional financing routes.

Strategic loans differ from traditional bank financing in their purpose and are designed to fund business ventures. Strategic lenders are often able to provide larger capital amounts with more flexible structures. They do not have the same regulatory constraints as traditional banks such as rigid revenue requirements or EBITDA targets.

A strategic loan is often flexible with options for cash pay or payment-in-kind (PIK) interest. A PIK loan means a borrower can pay their interest on the loans with additional loan balance rather than cash. This arrangement allows the investor to share in the company’s success as it grows and is not typically available through a traditional bank.

For businesses looking for a short-term or bridge loans, a strategic loan can be an ideal option. Flexibility afforded by strategic lenders can allow for financing options that last 6-24 months.

A strategic loans can also be structured as a unitranche. This is a hybrid first and second lien loan in a single tranche.. This often eliminates the need for multiple lenders and usually includes an single interest rate that is typically between the two interest rates of the individual loans.

Traditional financings are common structures and more of a commoditized lending product. While strategic loans are often more expensive than traditional loans, they offer benefits that make them ideal for certain situations. Each opportunity is tailored to meet the borrower's specific circumstances and needs. The flexible terms and tailored covenants can accommodate businesses that would run into difficulties with traditional lending solutions.

Who Should Apply for a Strategic Loan?

Strategic loans are less well known primarily because they are not ideal for all lending scenarios. When they are applicable, they can offer many benefits to the borrower. A strategic loan is often best for:

• Companies facing periods of transition

• Entrepreneurs looking to finance acquisitions and roll-up strategies

• Business owners trying to finance additional sales and marketing

• Capital expenditure budgets

• Management buyouts

A strategic loan can also be ideal for specialized cases such as counterbalancing large income loss, managing a recall or restructuring business operations. These situations are often temporary or transitional, and a strategic lender can help companies shift into the next phase of a lifecycle.

Strategic lenders are more likely to support businesses with less-than-attractive circumstances. For companies in more unusual or strained situations such as headline risk or involved with litigation, a strategic lender will often be more willing to offer financing compared to a traditional lender or bank.

High single-customer concentrations, contracts and unique collateral can deter traditional lenders due to the anticipated risks. In contrast, strategic lenders look more to determine investment opportunities. This enables them to be more willing to lend to entrepreneurs who are unproven and in the early stages of their business development.

Small businesses can find it difficult to grow without access to adequate capital. If the business does not demonstrate the ability to generate EBITDA, leadership will likely struggle to obtain enough financing to make strategic moves the business needs to thrive. This can include funding for early lifecycle acquisitions or capital to cover equipment breakdowns, relocation needs or cash flow interruptions.

The Benefits of Strategic Loans

With a strategic lender, companies are more likely to get capital without handing over board member seats or voting rights. Strategic lenders can also provide delayed draw capabilities allowing growing businesses to finance additional rollups or future acquisitions without incurring meaningful negative carry on unused cash balances. .

Speed and flexibility may be the largest benefits for most companies considering strategic lending options. Strategic loans can close quickly to support time-sensitive deals or urgent needs. This is often unique to strategic loans since traditional banks and private equity typically follow more protracted processes and are much harder to depend on in tight turnaround situations.

While many lenders have rigid debt requirements, a strategic lender may be willing to look closer at a company and offer more borrowing potential or creative options. Colbeck Capital is an example of a strategic lender that conducts due diligence to analyze a company’s potential and risk tolerance to offer maximized lending options.

Because strategic loans are crafted as custom solutions, Colbeck has been able to offer clients a number of unique funding options. One such company, an online retailer, needed more capital for sales and marketing but was not prepared to give up equity ownership. Colbeck financing offered a creative solution allowing the company to fund the growth before refinancing the debt with a low-cost traditional loan. This gave the retailer access to the cash they needed until they could accelerate growth and repay the loan while still retaining equity upside.

Thinking ahead about potential financial needs can help businesses fill gaps before they become serious obstacles to growth and operations. Colbeck Capital Management is committed to providing the best solutions to help companies reach their higher potential.

This article does not necessarily reflect the opinions of the editors or the management of EconoTimes