Capital Raising – A Key Challenge for Business Growth
For any typical business, access to appropriate funding is a major challenge. Many businesses struggle due to cash flow, lack of access to working capital, or probably due to wrong funding solutions not suited to nature or cash flow profile of the business. Many businesses struggle to grow beyond a threshold due to sub-optimal funding strategy.
Global financial uncertainty continues to cause anxiety amongst issuers and providers of capital. Corporates fear that future funding needs may not be met, while providers of finance worry about their capital positions and are not confident about funding corporates in a fast-changing business environment.
We have seen recently in UAE number of trading business houses “running away” leaving behind a significant amount of bad loans for the banks. Bankers, Financial Institutions and Investors are becoming more and more cautious thereby choking the flow of funds to even genuine business houses.
Broadly speaking, capital needs for a typical business can be categorized into Debt and Equity Capital with each of them having their merits and demerits. I will outline a few guidelines that can help to prepare your business for efficient capital raising (Debt / Equity) and tapping the diversified pool of liquidity:
- Think BIG -> Plan your funding roadmap: Relying purely on Private Sources for capital needs limits the business growth. Many successful large business houses could not have grown to their present size without being able to raise capital through multiple and large liquidity pockets i.e. Financial Institutions (Banks / NBFCs) and further through Capital Markets (Debt and/or Equity)
- Clearly Define your Funding Strategy: While developing and defining a Funding Strategy for business, Management must deliberate on following major factors: What is the most appropriate Capital Structure for the business?; What is the optimum level of leveraging / gearing for the business?; Rely purely on debt solution or expand through diluting equity stake?; What sort of debt instrument or combination of debt instruments is best suited for the business?; How much of working capital is required?; CAPEX Funding v/s Working Capital Funding Cash flow Management – debt profile or maturity is in sync with operating cash flow generation of the business?
- Identifying the right level of debt for the business: Both Under leveraged Balance sheet and Over Leveraged Balance sheet are not considered good for the business: The degree to which a business is utilizing borrowed money is defined as Financial Leverage. Companies that are highly leveraged may be at risk of bankruptcy if they are unable to make payments on their debt; they may also be unable to find new lenders in the future. Financial leverage is not always bad, however; it can increase the shareholders’ return on investment and often there are tax advantages associated with borrowing. Generally, business owners with a very low-risk mindset end up in an underleveraged business. A Behavioural argument suggests that a business may also become inefficient due to under leveraging, as the lenders may also help and create appropriate checks and balance for the business and bring financial discipline which is very important for the continued growth of the business.
- Identification of Right Funding Solution / Instruments: Many businesses fail due to the implementation of poor funding strategy/solution. For e.g. an Infrastructure project with a payback profile of say 10 years should not ideally be funded with a Term loan with three years of maturity. The cash flow profile of the business should be matched with the debt maturity profile. We have seen a number of countries/businesses getting into the financial crisis due to the wrong funding solution. Also, the optimum cost of funding can be achieved by applying the right funding solution. For e.g. an equipment purchase may be cost efficient if financed through lease financing compared to business loans. Similarly, procurement of a Capital Asset with ECA backed financing can be more cost efficient compared to a normal business term loan.
- Continuous Planning and Financial Discipline: Ability to raise capital (debt or Equity) to fuel business growth is a virtue. This requires years of planning and financial discipline. It cannot be an overnight solution. Careful planning and preparation are critical for a successful capital raising initiative. Companies have to plan well in advance and put in place dedicated resources and advisors to work in a focused manner. This includes but not limited to following key considerations and preparations: Implementation of Corporate Governance Mechanism; Documentation of policies and procedures; Transparency – Keeping Investors / Potential Investors Informed Audited Financial Statements Clean Audit Reports; Working with right set of Auditors and Advisors Clean Financial History of the company as well as promoters; Management Profiles; Banking Relationships; Management Accounts and reports; Public Profiling of the company; Risk Management framework, Internal Controls; Market Timing: Keep yourself ready and approach the market when the market is right for you
- Clear demonstration of the usage of the Capital: When a company issues new Debt or Equity, the borrower/ Issuer should be able to clearly articulate the specific purpose of the required new capital. The most common purposes of new debt include the following: To Fund CAPEX; To Fund OPEX / Working Capital; To Fund Growth / Expansion; To Acquire New Asset; To REFINANCE existing loan with a relatively cost-efficient loan; To REFINANCE existing Debt with a better structured debt more suited to the cash flow profile or capital structure;
Audited financial statements are subject to a series of judgment. Bankers, Investors or Analysts rely on Audited Books of Account, along with other due diligence which they generally perform. For those reasons – bankers, financial institutions and Analysts are more and more willing to accept reports from reputed Audit Firms and Advisors only. Bubble, crisis, contraction, and recovery are stages of the business cycle that keep repeating. Capital flow is closely linked to the economic cycle. In stricter market conditions, a robust business model, strong balance sheet, readiness to embrace greater investor scrutiny and accepting higher financing costs might be required. You can certainly achieve your objective with thorough planning and careful execution. Better get this right the first time, it becomes more difficult after one failed attempt. “Timing is Key” – Pitch it carefully. Keep your financial history clean and make it a competitive process by networking with the right set of bankers, financial institutions, and investors.
Be Transparent and Truthful: The financial markets are becoming more and more intelligent to see through any “Smart Accounting” or “Window Dressing”
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