Is your business generating in the region of $50 million in annual revenue? If so, then you have probably managed to establish a solid presence within your market, and may well be looking to strengthen your position through additional financial support – and perhaps even kick on to surpass the magic $100 million figure.
The US government’s Small Business Administration defines a small business as one generating revenue ranging from $1 million to around $40 million. With $50 million in annual revenue, then, your business will typically be classed as a medium-sized enterprise, albeit at the lower end of this category. And being at a later stage of development, then, accessing funds to fuel further expansion may well have now become a major priority.
Nonetheless, with many financing options aimed at both small- and medium-sized businesses, you will still be eligible for virtually the entire gamut of business financing solutions, with just a few notable exceptions. Here, we outline some of the most effective solutions for companies in your revenue bracket:
1. Private Equity
If your business is either already a private company or is publicly listed but wants to be taken private, then private equity can be highly suitable for a business of your size.
And presuming that you have managed to already achieve a modest market presence, at least a couple of avenues within private equity should now be open to you via funding from a private equity firm which manages a private equity fund that pools money from various investors to acquire stakes in private companies:
Growth Capital – if your company has achieved $50 million in annual revenue over a fairly short period of time, it means that growth and expansion has been swift. As such, you may well have already established a solid foothold in your market, and are now looking to scale up your operations and challenge for a more market-leading position.
And if you are willing to give up a minority stake in your business, then a growth equity fund can be just what your business needs to ascend towards fulfilling your upside potential.
While growth equity investors will typically only acquire a minority stake in your business, they may also negotiate board representation and change-of-control provisions as part of any funding agreement. Growth equity partners will also ultimately play a crucial role in guiding you towards an exit option, such as a strategic sale, or even an initial public offering (IPO).
Sound communication and trust are thus essential in growth equity financing between the key stakeholders, including your management team, the growth equity investment firm, and its investors.
Buyout – if you have been established in the market for much longer, but your $50 million in annual revenue is more the result of long-term stagnation than rapid growth, your business may need a comprehensive makeover. If so, buyout funds can provide the cash injection and necessary restructuring needed to revitalize your business’ growth potential.
There are two common types of buyout:
- Leveraged buyout – the 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.
2. Public Equity Financing
An initial public offering (IPO) occurs when, as a private company, you offer shares in your business to the public by issuing stock. As such, you can raise capital from public investors to fund your growth and consolidation goals, enabling you to expand considerably and perhaps even enter new markets.
Taking your company public might be the fulfilment of a long-term dream, one which can ultimately bestow substantial financial rewards. And with annual revenue of $50 million, staging an IPO is certainly possible. That said, a whole host of requirements issued by underwriters must first be satisfied, including:
- 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
Let’s say that you are aiming to list your tech firm on Nasdaq, the official requirements state that you must have aggregate pre-tax earnings in the prior three fiscal years of $11 million or more with no single year incurring a net loss during this period, as well as $2.2 million or more in pre-tax earnings in the previous two years.
Ultimately, at $50 million annual revenue, it will be hard work for you to realistically achieve the glittering prize of an IPO and public listing. But it remains achievable, especially if your business has achieved fast growth, is managed excellently, and has a demonstrably robust outlook over the coming years.
3. Debt Financing
Term Loans – among the most universal types of business financing, businesses of all sizes (except new start-ups) can receive term loans from banks and specialist/online lenders. Term loans will typically allow you to borrow a sum of money – as much as $5 million in some instances - under specific terms and conditions, including:
- the interest rate you agree to pay in return
- the term, or length of time over which you must repay the loan
- the amount and frequency of the repayments
- any collateral required for you to pledge as security on the loan
They normally require that your business has been in operation for at least 2 years, and can be either secured, whereby you are required to post collateral which the lender can seize should you default on your payment obligations, or unsecured which usually command higher rates of interest to compensate the lender for the additional risk exposure.
Business Line of Credit – there are a handful of revolving credit facilities that could prove suitable for your needs – the most common being business lines of credit and business credit cards. But given the medium-sized status of your business, it is more likely that you will want to raise a sizeable amount of funds – say, in the realm of 6 figures – that are considerably over and above the limits to which credit cards are typically confined.
As such, business lines of credit are particularly useful for making larger purchases over the short-term, with banks issuing this facility with a maximum credit limit and a “draw period” in which you can repay the amount owed. During this time, however, you can continue to pay down your balance and borrow more funds up to your credit limit, with interest charged interest only on the amount you have drawn.
Alternatively, the business line of credit can simply operate as a funding source that can be tapped as and when you need it, such that it provides an additional financial buffer to be used for unscheduled or emergency expenses.
4. Asset Finance
With $50 million in annual revenue, chances are that your business is big enough to have procured at least a few valuable assets that can serve as collateral against specific funding products. And if you can secure a loan with such collateral, you will often be eligible for larger amounts of funding and more favorable terms, including lower interest rates.
Inventory Financing – this is particularly suitable if you own a retail or wholesale business which requires selling lots of products to customers, and thus means you must ensure that those warehouses always remain sufficiently stocked in all relevant products.
The inventory you seek to purchase is typically pledged as collateral against the inventory loan you receive. Lenders will also determine the interest charged on the loan depending on the likely resale value of the collateral.
Equipment Financing – you may also need to buy heavy-industrial equipment to facilitate an expansion in your business operation. Or perhaps it’s more powerful office IT infrastructure you are after to, say, migrate to a cloud computing model, or even a new/expanded fleet of more efficient commercial trucks to deliver goods across the country.
In which case equipment financing providers might provide enough to cover the total cost of the equipment you need. You will most likely have to provide a down-payment to reflect the depreciation costs associated with most equipment. And the equipment itself typically serves as collateral for the loan you receive.
Commercial Mortgage – you may now be at the business stage where acquiring a property outright for your operation makes sense, and is now affordable in terms of the likely monthly loan repayments that you will incur. If so, a commercial mortgage can often make the most financial sense.
While rates are typically lower for commercial mortgages than other forms of debt-based financing, the overall nominal amount you must pay to lenders will still be sizeable. As such, it is worth ensuring that the monthly repayments will be manageable on your side, otherwise you risk giving up the entire property should you end up in default.
Approval for commercial mortgages can take several months, moreover, and it is worth being aware of the additional fees accompanying such a funding arrangement, including arrangement fees, appraisal fees and legal fees. But the chance to own your business’ premises and the freedom to house a business operation just as you have always envisaged means that applying for a commercial mortgage may still be well worth it.
Installment Plan / Hire Purchase – a type of asset finance in which you acquire full use of typically expensive assets such as inventory and equipment by paying an initial downpayment and then paying monthly installments to cover the depreciation cost of the asset, as well as interest to cover the capital cost.
Installment plans are useful if you do not want to pay the full amount for assets immediately. As such, it is more common in industries that require expensive machinery such as manufacturing and construction.
Interest and fees are charged by the financing company, with the former dependent on the resale value of your assets, and the latter required for loan processing. On completion of the payment under a hire purchase agreement, you then attain ownership of the asset.
Should you prefer to simply lease the asset instead of purchasing it, the lease terms will be more favorable to you through lower repayment requirements. But given you do not have ownership rights over the asset, you must return the asset at the end of the lease period. Alternatively, you can extend the lease period or introduce a buyer for the asset.
5. Revenue-Based Lending
A short-term funding option with terms usually no more than 12 months, revenue-based lending can be a hugely beneficial loan option for your business if you prefer to keep your repayments proportional to the revenue you generate each month.
With a fixed percentage of your revenues required as repayment instead of a fixed monthly installment, you never have to worry about your debt obligations exceeding your sales for any single month during the term of your funding agreement. This can be crucial for helping to keep a proportional amount of cash flow free every month to allocate towards other important areas of your company.
Given that you are already achieving annual revenues of $50 million, you should have no problem demonstrating your track record of solid revenue generation and strong financial history. Nonetheless, lenders may still probably require that you provide revenue projections for the coming months to determine how much they are comfortable to lend to you. And the amount you can borrow may be limited by your likely revenue over the agreed term of the financing; indeed, revenue-based lending is typically associated with “light” capital such that it might not satisfy the extent of your spending plans.
6. Invoice Finance
Does your business suffer from long waiting periods between sales being earnt and actual cash flows being realized? If so, chances are that the delay is down to invoices being issued to customers that in turn are taking anywhere from 30 days to 120 days to be fulfilled.
If you are finding that such delays are putting undue pressure on your cash flow, you might want to seek out funding that helps alleviate the pain during these periods, with invoice finance being an optimal solution. This funding is helpful when the focus of your business is on selling goods and services to other business (B2B) rather than to retail customers, especially given the widespread use of invoices within the B2B realm.
Invoice Factoring – this involves selling your outstanding invoices to a third party known as a “factoring company”, which in turn will pay you a lump sum up-front (less a service charge) to take over the management of those invoices. The customers must then fulfill their invoice payment obligations with the factoring company instead.
You can normally receive up to 90 percent of the value of the outstanding invoices, which can amount to a hefty cash injection for your business, and ultimately a significant easing of your cash flow strains.
Given that management of the outstanding invoice payments now lies with factoring company, however, it is worth ensuring before agreeing to any deal that you are comfortable with the company managing this part of the relationship with your customers in an acceptable manner. You should also be aware that service fees charged by factoring companies can accumulate to a substantial amount should your customers make frequently late invoice payments.
Invoice Financing – this involves obtaining a loan or line of credit from a lender with the outstanding invoices serving as collateral against the facility. Much like invoice factoring, this funding option enables you to generate cash flow from unpaid invoices. In this case, however, you are entering a debt agreement in which you repay an external lender as your customer(s) pay their invoice obligations.
Again, such a financing arrangement will be suitable if your business has a strong history of trading that require customer invoices to be issued – and if payment of those invoices by customers represent a sizeable proportion of your revenues.
The terms of an invoice deal also tend to be more favorable than those of a comparable term loan from a bank. And unlike invoice factoring, you always remain in charge of your customer relationships – there is no outsourcing of invoices to a third-party. But again, late customer payments will cause the fees from the lender to pile up.
