You did it. You managed to hit 9 figures in revenue. And your position as one of the leading companies in the market has been consolidated. Understandably, you feel elated at your company’s achievements.
But why stop now? Indeed, for many, generating $100 million in annual revenue is just a signpost on the road towards accomplishing the ultimate prize of hitting the $1 billion mark. If that sounds familiar, then you will probably want to seek out the best financing options to drive further expansion and scaling, and perhaps even conquer new domestic and international markets.
Having already accumulated a robust financial history and strong credit rating along the path to $100 million in annual revenue, the good news is that the variety of financing options open to you – and the relative ease with which you can obtaining financing – are most likely greater now than at any previous point in your business’ evolution.
With an extensive and transparent track record, you now have the power to secure financing at favorable terms. And having probably accumulated a significant number of valuable assets to date, you can more easily repay your financing obligations via the sale of those assets, if needed, such that lenders are now more comfortable providing you with the funding you need.
The following list of financing options are some of the most popular, and most suitable, for a company generating $100 million in annual revenue, complete with key features and challenges of which you should be aware.
1. Public Equity Financing
While you may have found it difficult to achieve a public listing previously when your business was only generating annual revenue in the region of, say, $10 million, you will almost certainly find it easier to raise capital from public equity investors now that you have hit the $100 million revenue mark.
At this level, going public can be a realistic ambition. If so, you can raise substantial capital through an initial public offering (IPO), as well as through subsequent post-IPO funding strategies to finance such endeavors as growth in new markets, sales and marketing, research and development, and capital expenditures.
With your shares trading on a liquid stock exchange such as the New York Stock Exchange (NYSE) or Nasdaq, moreover, you can gain considerably in market cap valuation and in stock price than as a private company. And if applicable, the proceeds of an IPO can be used to retire debt, lower interest costs and improve your cash flow.
That said, the application process to undergo an IPO is rarely easy. Key steps must be taken before you can issue stock to the public. But if you satisfy the criteria, you can gain access to substantial capital, especially if your company is projected to deliver strong growth over the coming years.
For example, a New York Stock Exchange Listing requires your aggregate net income for the last three fiscal years to be least $10 million, with each of the two most recent fiscal years exceeding $2 million and no losses recorded in each of the prior three fiscal years. Additional listing requirements will typically include:
- Revenue that is predictable and consistent
- Strong growth potential still ahead for your business
- A strong management team already in place
- A low debt-to-equity ratio such that your company is not highly leverages
- Strong internal processes with robust operations that can stand up to public investor scrutiny
- Strong and realistic financial projections for at least the next 3 years
It is also worth emphasizing that going public means giving up ownership in your company to public shareholders. If that is something that puts you off, then equity financing may not be for you.
But if you wish to proceed, then ensuring that your business has achieved solid growth, that it continues to consistently deliver and beat market expectations, and that it remains well-managed with strong internal processes will reap potentially massive financial rewards for you in the long-run.
2. Private Equity
As a private business making $100 million in revenue, private equity represents one of the most popular methods to raise money. Typically, this financing option involves private investors pooling their funds together through a fund managed by a private equity firm, and then acquiring an equity stake in your company with the intention of making a sizeable return as your company continues to grow and improve its valuation.
And if you are planning for an IPO in the future, the private equity firm can also use this offering event to exit from its position in your company.
Series Funding - If you still believe you are not quite ready to stage an IPO, you may want to first boost your valuation through private investors beforehand. As such, a company of your size may feel comfortable engaging in a Series C round of funding.
With Series A funding your scalable blueprint for growth into a robust company, and Series B funds helping you to turn your established market presence into further expansion and greater market share, a Series C round will take you to the next stage of growth which could mean entering new/overseas markets, preparing to go for an IPO, or even acquiring another underperforming company in your industry.
Given that your company, your products and your financials are demonstrably proven at this stage, private equity firms and other financiers such as hedge funds and investment banks will be more willing to jump on and commit potentially massive sums towards supporting your future expansion.
Buyout – should your business be generating $100 million in annual revenue but is struggling from declining growth prospects - say, due to rising costs, outdated or uncompetitive products, or poor management - you might need financing to improve your valuation and raise your growth outlook once more.
Buyout funds pool investor resources to provide the funding and restructuring necessary to help reignite your forward growth trajectory. This can be achieved through two main routes:
- Leveraged buyout – the buyout fund borrows potentially substantial amounts to acquire a majority stake in your company, and thus depends on significant leverage to boost the potential rate of return.
- Management buyout – the existing management team acquires a controlling share of the business’ assets, and is funded by the private equity firm to do so, usually in exchange for a minority stake in the company.
Once the buyout fund’s goals have been achieved, investors will usually either sell their stake at a healthy profit, or take the company public at a higher valuation.
Mezzanine Financing – A hybrid of equity and debt financing, mezzanine financing combines the best of both worlds to help larger businesses, often as a stage just before you attempt an IPO. By combining both debt and equity lenders, a mezzanine loan can also provide you with the funding to acquire a competitor, or acquire the management of another company.
Loans are typically short-term, lasting a maximum of 12 months. If you are subsequently seeking to undergo an IPO, the loan is often repaid using the proceeds from the stock offering. Alternatively, if you are unable to repay the mezzanine loan, the lender could structure the financing such that the debt you owe is converted to an equity stake in your company.
3. Bridge Financing
Another short-term funding solution, bridge financing can be either debt financing or equity financing, and is mainly used if you are anticipating a gap in funding before you can next secure long-term funding.
Suppose you own an oil & gas company which, having finished exploration of a particular oilfield, is seeking to commence production of the proven oil reserves there. You thus opt to secure $10 million in bridge financing to develop the oilfield as a stop-gap before you next raise capital via issuing more shares. The expected bump in earnings from this new source of production will then be used to pay off the loan.
Given the considerable risk and potential delays from such a project, the lender will typically charge a much higher interest rate than a comparable term loan, and may even stipulate that this rate will continue to rise should you fail to repay on time. Or the lender may include a provision that requires a portion of the loan to be converted to an equity stake upon certain conditions being met.
Bridge financing is also a popular short-term funding method to cover the costs of your impending IPO, with the money raised from the offering used to repay the loan. Such agreements often additionally grant the underwriter a portion of shares in your company at a favorable price as part of the loan deal.
4. Debt Finance
Term Loans – at $100 million in annual revenue, and assuming your debt-to-equity ratio is not already excessive, banks and other lenders will be willing to offer you a term loan – as much as over $5 million and perhaps even beyond 60 months – as a capital injection and/or to make large asset purchases. Should you have existing assets that you can both pledge as collateral against the loan, and potentially sell to make repayment in times of trouble, the lender may also offer you a favorable interest rate on the loan compared to smaller companies.
Business Line of Credit – as far as revolving credit facilities go, a business lines of credit is probably the most suitable for a company of your size, as it will enable you to borrow more funds to make larger purchases than, say, a business credit card which has a much lower credit limit.
This facility includes a relatively large credit limit – over $300,000 in some cases – as well as a “draw period” during which time you can continue to pay down your balance and borrow more funds as you see fit. Interest is charged only on the amount you have drawn at any given time.
5. Working Capital Finance
Companies of all sizes might need additional funds to bolster their working capital – that is the difference between your Current Assets such as cash, inventory, equipment, financial security holdings and accounts receivable, and your Current Liabilities including salaries, rent, short-term debt payments and accounts payable.
You might need more working capital funds to expand your sales and marketing efforts, or boost investment in research and development, or even just to cover the delay before you realize your cash flows. As such, lenders provide several specific working capital facilities:
Trade Finance – This funding option helps you to crucially fulfill increasingly large customer orders by providing the funds to purchase the necessary inventory in good time, without you having to struggle to raise the working capital. Trade finance lenders will also usually only work with companies with turnover in the millions of dollars, and as such, this type of financing will appeal to a business of your size
Let’s say you own a wholesale company which both buys products from a supplier and sells them to a retailer. Given the popularity of your products, the retailer wants to order ten times the amount for the coming month than you have been normally selling. But you do not have the sufficient cash to place such a correspondingly large order with your supplier.
As such, you can approach a trade finance lender such as a bank which acts as a crucial third-party to provide the necessary working capital to quickly order the products from your supplier. You can then sell the products to the retailer as usual, with the retailer paying the trade finance lender instead. This facility thus enables you to grow your business without having to wait long periods to acquire the necessary working capital.
Should the retailer be a new trading relationship that is perhaps based overseas, you can also secure the transaction via a Standby Letter of Credit with your respective banks. This guarantees that should the buyer fail to pay you, the bank issuing the Letter of Credit will compensate you. This can be hugely beneficial for growing your business in new markets, but it also requires considerable documentation from your side before being approved.
Invoice Finance - Taking the trade finance example one step further, although the lender can help to crucially minimize the delay between ordering from your supplier and delivering the order to your retailer customer, you may still have to wait for several weeks, if not months, for the retailer to pay you under existing invoice agreements.
Indeed, with such agreements allowing for up to 120 days to make payment in some instances, the wait to receive money can be excruciating, particularly if you have debt obligations to fulfill such as the ones to your trade finance lender.
But with an invoice finance agreement in place, you can receive up to as much as 90 percent of the value of the invoices as an up-front lump sum payment. As such, you can immediately repay the trade finance lender – or any other creditor awaiting your repayment – without having to potentially incur late payment fees. There are two main types of invoice finance:
- Invoice Factoring – by selling your outstanding invoices to a third-party known as a “factoring company” in exchange for cash (less a service charge), you will receive funds immediately. The factoring company then manages the outstanding payments from customers for those invoices.
While it can be a convenient solution for reducing long waiting times for your customers to pay you, invoice factoring can become expensive if your customers take a long time to make payment – the longer it takes, the more you will pay the factoring company in additional fees charges. It is also worth asking yourself whether you are comfortable with a third-party managing this potentially sensitive aspect of your customer relationships.
- Invoice Financing – much like a secured debt financing facility, invoice financing involves obtaining a loan or line of credit from a lender with the outstanding invoices serving as collateral against the facility. Again, this enables you to generate cash flow from unpaid invoices, but does not involve a third-party. Instead, you repay the lender as your customer(s) make payment on their invoices.
This method is preferrable to invoice factoring should you want to retain complete control of your customer relationships – you remain in charge of collecting payment.
Overdraft – this financing facility is commonly provided by your bank, and allows you to purchase goods or withdraw cash even if you do not have sufficient money in your account. As such, overdrafts can help to temporarily ease any strain on your working capital, and is often sought as a financial buffer for absorbing any unexpected expenses.
Normally, the bank will grant you an approved overdraft limit either over a fixed period or as an indefinite rolling facility. Exceeding the limit, however, can incur steep charges, so it is worth agreeing to an appropriately sized facility and always remaining within the limit.
