The devil is in the details when financing for growth


By Mario Paron
Canadian Managing Partner, KPMG Enterprise, Hamilton

The prospect of seeking out funding for growth can be a daunting one. Even the most robust of businesses need to ensure they have all the prerequisites in place when speaking to potential lenders.

A basic must-have when seeking financing for growth is a well thought out business plan. Typically financiers will ask for both short- and long-term projections. In response, you should have details at the ready on what your business will look like in 12 months and what you are forecasting for the next five years. It’s very important in that process to demonstrate solid financial forecasts, including cash flow.Many times, business owners will pull together revenue, expense and P&L reports when they start talking about financing for growth; but the cash flow questions will follow. Expect the lender to ask what you are using the proceeds for and what are the projected cash flows from that spend.

On the back of that is the ability to show you have an appropriate capital structure to run your business and more importantly, to manage risk. A good approach is to look at what your peers are doing in terms of how they are capitalized, and what would be considered acceptable risk. Providing a sense of context for managing business and financial risk is an important piece of information for lenders. Remember that financial risk can vary considerably depending on the risk profile of the business in question and industry norms. Some business owners simply don’t want debt and others want lots of financial leverage. Leverage availability is dependent on your industry sector, the types of products or services you sell, and your competitive market position.

During the preparation stage, I strongly advise business owners to conduct a sensitivity analysis.  This shows that you have considered alternative strategies, should growth projections not follow the plan.

Once you have done your planning and compiled your information, you want to assess your financing options. The structure of third party financing is largely dependent on three things: equity value, asset value and cash flow strength of your business. Depending on where you fall in that spectrum, it’s prudent to look at the most viable options for maintaining your business, while providing flexibility for growth.

Lastly, I would advise you to prepare a succinct management presentation of your business. Succinct is the key word here. Keep things to 10 to 20 pages. You may also consider working with an advisor to make sure you are reaching out to the most appropriate sources of capital to present your business proposition. Capital availability for the mid-market is improving and borrowing rates continue to be very attractive. As we move forward, banks and alternative lenders are more open to new funding opportunities, which is good news for all.


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