Commercial debt financing has a lot to do with figuring out the term structure jigsaw puzzle that relates to your business or the capital requirements of what you require funding for.
Each category of asset will command a different type of risk profile and will attract different lending programs. On the surface, that seems clear enough to most, but the challenge comes in trying to get the right amount of leverage at the lowest cost of borrowing.
For instance, many lenders will have primary and secondary financing options. They will provide you with their primary offering on a certain class of assets and a secondary offering on other assets you hold. Or they can bundle their offering whereby you can get the business financing you’re after from them, provided that you transfer personal financing requirements and investments to them.
For more established businesses, the challenge is to take what you have to leverage both commercially and personally to secure the best potential deal at any give point in time.
This may involve one lender or a number of lenders, each focusing on a different classification of asset and term structure of debt. While the single lender model may be preferred, it doesn’t always provide the amount of leverage required. For greater leverage, the different categories of assets (working capital – accounts receivable and inventory, equipment, real estate) need to be financed through lenders that specialize in that particular asset class. This can also drive up the overall weighted average cost of borrowing, but this may be a necessary trade off to secure the amount of capital required in the short term. Obviously there will need to be sufficient sales and margins to cover the cost of financing and over time the goal would be to reduce the cost of funds and take on a better term debt structure overall.
The challenge to any business owner is that their situation will always be somewhat unique to anyone else and therefore a customized solution is required whereby the business owner figures out the best lender offering or combination of lender offerings that best fit his or her business at a given point in time.
And once a financing structure is decided on and put into place, there is still going to be an ongoing requirement to stay ahead of the curve and either find better financing options that improves leverage and cost requirements or provide for alternative financing scenarios in the event that one or more lending partner changes their interest in financing your business.