Finding capital in the credit crunch

Thursday, November 27, 2008

Marian Lenz, Merrill Lynch, Pierce, Fenner & Smith, http://www.totalmerrill.com/TotalMerrill/system/ViewFAPage.aspx?pageurl=marian_lenz

To gain access to the credit you need during these challenging times, you may have to consider some creative strategies and nontraditional sources.

Owners of small and mid-size businesses need capital, even during an economic downturn. And while there are signs that the frozen capital markets may be thawing, traditional financing can remain difficult to obtain, even for creditworthy firms.

In times like these, whether you need to finance operations, purchase additional equipment, fund an acquisition or buy out a partner, you may have to consider alternative financing sources. As you review your current funding options, it’s important, for the long-term health of your business, to consider what capital will be needed to meet your current and future business plans.

“One solution being discussed more frequently these days is securities-based lending,” says Joe Poy, a Director with Merrill Lynch, Pierce, Fenner & Smith. “Clients who run successful businesses over a period of time have built up a fair amount of personal liquid assets, which they can access for a securities-based loan for their company.”

Liquidity with tax advantages

With securities-based financing, such as a Merrill Lynch Loan Management Account® (LMA), a business can gain access to needed capital and may achieve a tax deduction on the interest payments. Meanwhile, the collateral base for the loan, the securities you own, remain in their original account while helping you to keep your investment strategy on track.

“Typically, when traditional bank debt becomes more restricted, the next approach is asset-based lending,” explains Poy. “It can be more expensive and involve more monitoring and reporting, depending on the type and terms. But in credit conditions such as we’ve experienced recently, business owners are considering that next step in terms of costs and structure. The spectrum ranges from senior debt, starting with secured lines of credit, to asset-based lending, then subordinated or mezzanine debt, and ultimately the equity realm, where a business’s decision makers may choose to share ownership in the company.”

Possibilities in private placement

While the overall credit markets remain challenging, some institutions are beginning to make loans again. “We’re receiving more requests from business owners looking for help raising capital,” says John Stewart, Director, Merrill Lynch Middle Market Investment Banking. “We help clients by matching them with third-party investment bankers who specialize in private placements of capital. These bankers have their fingers on the pulse of the capital markets. They advise our clients on feasible capital structures and run competitive processes to optimally place the capital.”

Trade credit and “friendly capital” rank among the less-expensive forms of alternative financing. “Some well-capitalized companies that want to grab market share may provide relaxed credit terms in order to win new customers,” Poy says. “And choosing to borrow from family or friends may offer the additional advantage of more flexible repayment schedules and lower interest rates.”

Accessing capital to meet your business needs

To explore the various financing options now available, review these questions with your Financial Advisor:
* What are the most cost-effective funding options currently available for my business?
* In light of my personal liquid assets, how might a securities-based Merrill Lynch Loan Management Account help me meet my business needs?
* If I am able to wait, should I hold off until credit becomes less restrictive, or am I missing an opportunity now?
* What resources are available to my company if I want to sell equity in my business?

Community banks or credit unions may also grant loans with manageable terms, Poy says: “Many community banks are still offering credit because they avoided taking on bad loans and maintained a conservative approach to credit.”

Consider carefully the more expensive capital options, which tend to carry relatively restrictive terms and covenants. These include hedge funds, private equity sources, peer-to-peer lending networks and merchants offering cash advances, such as royalty financers or factors. For example, a factor provides a cash advance to a company in return for a percentage of future sales—as much as 30%. Funding options such as these may not be appropriate for all companies, but can work well for high-margin businesses.

Making the best choice

Before you consider any funding options, talk with your Financial Advisor about your business’s capital needs. By getting solid advice up front, you’ll have the information you need about what kinds of funding are available and at what cost, maximizing the benefit to your business of whatever form of capital you choose.

“Don’t make funding decisions in a vacuum,” says Poy. “Use your Financial Advisor as someone to help you reality-check your ideas. Whether you’re borrowing from a senior lender or a mezzanine lender or even thinking about selling equity, your Financial Advisor has access to banking specialists who have expertise in most funding scenarios.”

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