Choosing the Right Debt Financing Option for Your Company

This is an exciting time for companies that weathered the recent economic downturn and are now seeking to grow. For many of these businesses looking to expand, financing tools to support business growth will be a cornerstone of success.

No magic formula exists for choosing the right funding tool or strategy for your company. The best solution will be based on your business’s capital structure, your current situation and your unique and specific financing needs, says Richard Hillsman, Managing Director and Group Head of Debt Capital Markets at Fifth Third Bank.

You should begin looking to your financial institution for support when long-term financing is needed. Here’s a look at alternative capital-raising tools and solutions for capital-hungry companies.

Taking out syndicated loans.

This strategy involves arranging a group of banks or other lenders (a “syndicate”) to provide credit to a borrower under one common credit agreement. This option is the most common alternative financing tool used by his clients, Hillsman says, because it allows maximum flexibility. “A solution can be tailored to fit a company’s specific need or situation,” he says. These multi-bank credit facilities typically range in size from $10 million up to more than $1 billion, in some cases.

Issuing public bonds.

This option is a good fit for public or private companies with revenues over $500 million. They typically need capital over an extended period but don’t want to repay until maturity. The downside of issuing public debt is that you must make your company’s financial details public through regulatory filings, Hillsman says. “But for a company looking for a lot of money on fairly generous terms, this capital market is one that ought to be considered.” Most corporate bonds are bought by institutional investors and held for five- to 10-year terms at fixed interest rates.

Issuing private notes.

“For a private company not interested in divulging its financial details to the public, a private placement of notes may make more sense,” Hillsman says. Insurance companies tend to be the principal investors in the private placement market. As with public bonds, the tenures are typically in the five- to 10-year range with fixed rates, although there are some floating-rate note deals done. “In this scenario, you’re generally dealing with one investor or very few insurance company investors in a credit-only relationship,” Hillsman says.

Securitizing financial assets.

Akin to the smaller company strategy of factoring accounts receivable, securitization allows larger companies to monetize financial assets that they hold on their balance sheets. The money is typically used to fund working capital and ongoing operations and the arrangements usually last one to three years. Borrowing rates are often lower than typical bank rates because the deals are highly structured and secured by the company’s best — and most liquid — assets. “Credit card companies do this a lot because their primary assets are customers’ receivables,” Hillsman says. The process is more complicated than straight factoring because it involves taking a company’s financial assets and selling them to a newly formed affiliated entity and then from that entity to a bank or group of banks. The intermediate entity is used to shield banks from bankruptcy risk, Hillsman explains. “Securitization is a highly structured arrangement that requires a fair amount of time and thought up front,” he says.