Canada: The Right Fit: Finding The Ideal Funding Mix For Your Growth Goals

Strategies on enabling growth and expansion

As a private business owner, you're faced with a multitude of growth opportunities. The challenge lies in selecting those that best fit your business. Whether you're intending to pursue product expansion, new customer acquisition or market growth, the challenge isn't uncovering new ways to grow—it's prioritizing the options in front of you and appropriately funding each option to turn them into reality.

While this is undoubtedly a good problem to have, setting the groundwork for sustainable growth requires its fair share of work.

"Most private business owners discover early on that due to limited access to capital—not to mention other resources such as labour and technology, for example—taking on everything at once is difficult, if not impossible," says Kevin Fraser, Partner, Corporate Finance. "This is when it becomes apparent that a clear growth strategy is a necessity."

This article will assist you in establishing a foundation to enable growth and expansion by helping you determine your company's ideal growth opportunities, identify and access the right funding mix and partner to achieve your goals.

STEP 1: Clarify your growth goals

Establishing clear growth goals is an essential first step for private business owners who are setting the stage for growth and expansion.

Through the use of the proper metrics, information and processes, you and your team of advisors can identify the most attractive growth opportunities, assess which investments are likely to deliver the best return and help answer difficult questions— something potential lenders will appreciate.

For example, if you plan to expand to a new market, which markets will you target? If you're looking for new customers, which customers are optimal? What are the risks associated with going after a customer in a different vertical—and how do they compare to the potential rewards? What is the potential payback of an investment in a new piece of equipment, a physical expansion or an IT system upgrade?

"A sound growth strategy offers you the necessary foresight to know where your company is headed, so that you can prepare accordingly," says Kevin Fraser, Partner, Corporate Finance. "By identifying your funding needs early on, you can also position your business in such a way that you can access the most appropriate funding sources when you need them."

While there are numerous ways for a business to grow, the three primary avenues of growth include:

  1. organic growth realized through market expansion, new customer acquisition, productivity improvements and operational efficiencies;
  2. capital-funded growth, which includes expansion into new markets, developing new products, attracting new customers and/ or investing in new locations, technologies, equipment or skilled workers; and
  3. acquisitions, which involve the purchase of a competitor or complementary business.

If capital-funded growth emerges as one of your top growth goals, the earlier you can define your capital requirements, the easier it will be to identify the optimal funding source(s). With the right information in hand, you'll not only be able to clearly define your capital needs but identify your ideal funding partner(s) as well.

STEP 2: Identify your optimal funding sources

Given the current strong lending environment, many businesses opt for debt financing when funding expansion. Senior debt is readily available for strong performers at historically low interest rates, which bodes well for today's borrowers.

Yet, while you may have a strong relationship with your lender, debt is not your only option—and, depending on your objective, it may not be your best. There are plenty of financing alternatives out there, from subordinate debt financing to private equity and everything in between.

"In recent years, private equity financing has become increasingly available to smaller businesses in Canada," says Jeff Pocock, National Leader, Private Equity. "Keep in mind, however, that each funding source comes with its own cost, structure and lending preferences, so finding the right one for your growth objective—and your business—is integral to the success of your expansion."

The financing you choose will depend, firstly, on the type of investment for which it is required. If it's something that is unlikely to generate positive criteria of traditional funding sources. You must also consider your personal preferences—how comfortable are you with taking on debt?—as well as the specific situation. When it comes to capital structure, there's no one-size-fits-all approach— sometimes a combination of traditional senior debt, subordinate debt or even a new equity partner will make sense for a specific deal at a specific time.

While you ideally want to pursue the most cost effective sources of capital first, it's important to remember that you can put your business in a precarious position if you don't appropriately manage the expectations of your financial partners. Sometimes, a more patient source of capital will afford you the flexibility you require—and better fit your needs.

How are you growing?

To avoid surprises, business owners should determine answers to these questions:

  • What are our growth goals?
  • What is our strategy to achieve these goals?
  • How much capital will we need?
  • When will we need this capital?
  • What type of capital will we require?
  • Do we have access to this capital?
  • What is the return on capital employed for each growth option?

STEP 3: Set yourself up for success

Like all business owners, capital providers are searching for financial opportunities that will allow them to meet their goals while minimizing their risk exposure. Understanding this is an integral part of successfully pursuing—and obtaining—capital.

That's why, when it comes to interacting with lenders, appearances matter. You need to dress the part—in the sense that your business has to look its best—for capital providers to offer you the funding you need. A well-presented and supportable financing proposal is the key to a stellar first impression.

This document must provide a comprehensive summary of the business, including sufficient historical and projected financial information. "Often, private business owners benefit from calling in external advisors in this situation. After all, when a financing proposal is properly prepared and presented, businesses reap the benefits in the form of improved pricing, relaxed security requirements, flexible financial covenants, reduced personal guarantees, minimal lender fees and more patient reporting requirements—to name just a few," says Jeff Pocock.

A comprehensive financial forecast is another important component of your financing package. This forecast should outline your company's capacity to repay debt according to a potential lender's terms and conditions. It should offer a detailed description of key assumptions on which it is made, and have the ability to be adapted to different financial scenarios. Sometimes a lender may request a more sophisticated financial model to support the financial forecast, the purpose of which is to arm the lender with as much information as possible so it can offer a flexible payment schedule and covenant package, avoid surprises and better assist you during potential cash "stress points".

Moving forward

The earlier you can articulate your business's strategy for growth and expansion, the earlier you can start executing it. Such a roadmap helps point your company in the right direction, define your ideal growth opportunities and narrow down the type of financing that best meets the needs of the business.

Whether you have someone internally to navigate the complex terrain of capital funding, or opt to reach out externally to leverage the services of an experienced advisor, your goal should be to equip your business with the best resources available to make growth a priority, and optimize your chances for success.

Your financing package should include:

  • Company background
  • Drivers of growth
  • Management background
  • Assessment of security and collateral
  • Historical financial information with key operating statistics
  • Financial forecast reflecting the inclusion of the requested financing
  • Forecasted financial covenants indicating ability to service the requested financing at market acceptable leverage and liquidity levels
  • Commentary on key non-financial requested terms and conditions
  • Sources and uses of the financing

The elements of a strong financing proposal

Your financing proposal should include

  • a historical overview of your company,
  • details of your growth plan, your stakeholders and your financing requirements,
  • an overview of the historical financial performance of your business,
  • an outline reflecting the impact the requested financing will have on the business moving forward, and
  • a detailed account of how you plan to repay your lender within reasonable covenant restrictions, as well as potential risks you might encounter that could prevent repayment.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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