The CEO’s Guide to Debt Financing

Making Debt Work for You

Working with an investment banker can help companies find the right type of financing structure for their long-term goals, and clue them in to new ways negotiate the best funding opportunities to meet their overall needs.

Q: How can working with an advisor help business owners?

Business owners are experts at running their businesses, and they’ve probably had some experience dealing with a local bank. For business owners who are looking to finance a major capital expansion, acquisitions, solve working capital needs, or some combination of these things, working with an investment banker is a surefire way to secure funding, often at better rates with better terms. Investment bankers are experts at knowing a variety of funding sources (beyond the banks), and they’re knowledgeable about term options and skilled at negotiating the best opportunity for their clients.

Often, companies make the mistake of looking to solve only their immediate concerns, and fail to consider what’s appropriate in the long term. We work with companies to analyze their long-range goals and to formulate a financing structure that best meets their overall needs.

Q: What’s the first step when working with a business?

We analyze their business plan and financial statements to determine their long-term capital needs and advise them on the optimum capital structure — one that provides the most flexibility at the lowest cost. Because lenders often tie covenants to operating plans, we also advise business owners to create two plans: an aggressive internal operating plan, and a more conservative plan that will be shared with the lender.

Q: How do you advise a company to think about equity vs. debt?

The difference between the cost of equity and debt is significant. At the same time, there are risks when leveraging a company with too much debt. We look to create the optimal structure that minimizes costs and meets the risk tolerance of the business owner.

Q: What’s one of the biggest misconceptions CEOs have about debt?

Many CEOs do not realize that they have to manage the process of obtaining financing. The more work they do up front, preparing a strong package of information, researching the appropriate lenders, and understanding the debt market, the more likely they are to be successful, and at lower cost. Banks and various lenders are very different. Restrictions and requirements differ from lender to lender, sometimes even within the different departments within the same institution. CEOs often don’t understand that if they can satisfy a lender’s requirements, they will be sought after.

CEOs are saying they can’t get debt. Too often, they’re looking in the wrong places, or are not adequately prepared. CEOs considering debt should talk to an advisor to help them navigate the variety of options and lenders, and to determine the optimal level of risk at the lowest possible cost.

Alan Scharfstein is President and founder of The DAK Group, an investment banking consultancy serving mid-market firms. Visit The Dak Group’s website here.

©2016 Axial.com. Reprinted with permission.

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