Alternative Capital Solutions in Uncertain Times

The coronavirus pandemic has caused significant economic disruption to lower- and middle-market companies, including liquidity issues and lack of available capital. Many business owners will pursue funding through their traditional lending sources (e.g., banks), the Small Business Administration (SBA), and the Main Street Lending programs. However, these sources may prove to be inadequate or unattainable for many borrowers, and traditional growth capital may not be as readily available compared with pre-pandemic times.

Many traditional lenders are also facing challenges brought on by the pandemic, such as increased credit demands, limited personnel, and a growing inventory of customers falling into financial difficulties. Business owners and their advisors can also expect increased scrutiny on financial results, capital structure, projections, and cash flows during upcoming annual credit reviews and approvals.

Alternative capital and financial arrangements may be an effective solution to help business owners address capital needs.

Defining alternative capital

Alternative capital solutions have gained recognition since the 2007 – 2009 global financial crisis. Their growth and popularity was driven by investors’ search for yields in a low interest rate environment.

Some of the most popular alternative capital products are:

• Preferred equity includes both equity and debt-like characteristics. Investors typically hold rights to a fixed rate of return that is accrued and paid to investors.
• Mezzanine debt is often used for acquisition or growth financing, and can include warrants or other equity components that provide additional upside to investors outside of the pre-determined debt yield.
• Convertible debt instruments start out as debt-like obligations with a pre-determined yield, but have the ability to convert to equity in the future.
• Bridge loans are short-term debt instruments that provide liquidity while a company seeks long-term financing solutions.

The appropriate alternative capital solution will vary based on specific borrower and industry characteristics, amount of capital required, length of desired payback period, and other variables.

Navigating alternative capital options

These challenging times cause inherent difficulties when evaluating the need for additional capital solutions. Revenue and cash flow forecasts are constantly changing as each company evaluates the impact of COVID-19. Follow a thoughtful and intentional approach to help you navigate options and find the best solution. Unlike public markets, alternative capital solutions are available to lower- and middle-market businesses and their owners.

Here are the top items to consider as you move down this path:

1. Develop a clear message that describes the need for capital and your ability to provide a return to the capital providers.
2. Ensure your financial picture is in order and prepare a package of historical and future financial information including:
   • Updated budget and current cash flow burn run rate.
   • To the extent possible, understand and quantify the impact of
     COVID-19.
   • Develop a multi-scenario cash flow forecast that incorporates net working capital trends, capital expenditures, and debt service obligations.
3. Talk to your current capital sources to help them understand your current situation and strategy. There may be additional options that you have not discussed.
4. Realize the alternative capital market is highly competitive. Evaluate multiple sources and options to secure the best deal.

How we can help

When incremental bank debt is not available or desirable, alternative capital and financing options are worth exploring. CLA has the teams and capabilities to help you evaluate these options in the context of your particular situation.

CLA professionals can help you prepare for discussions with lenders and the alternative capital providers. Whether through modeling, detailed analysis, or identification of potential partners, advanced preparation is critical to establishing credibility with capital providers. It can also shorten the time frame for obtaining the much-needed capital.

If you are interested in discussing alternative capital solutions or believe your capital needs extend beyond your bank’s current capabilities, contact your CLA team.

• CLA’s investment banking and transaction services professionals have experience and long-standing relationships with many providers of alternative capital solutions. We can help you explore potential options.
• We will work together to understand your capital and financing needs, evaluate options, and help you as you navigate the path to greater liquidity.
• Our teams are here to assist you with obtaining your much-needed capital.

Unforeseen disruptions — from the coronavirus (COVID-19) to natural disasters — can create many uncertainties. CLA has developed resources to help you lay out a strategy to put your organization on its toes versus its heels. Bookmark our financial management and disaster relief resource page to stay current on these issues.