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Mid-market companies need funding to support their expansion efforts, and there are a number of creative ways they can go about getting it.

It’s a common predicament: a mid-market business is performing well, posting strong sales and spotting new market opportunities. But to successfully grow, this business needs an infusion of capital, whether that’s used to make a strategic acquisition, expand operations to increase capacity or hire a team of marketing aces to increase awareness about its products and services.

Where will the funding come from?

There are many things to consider, depending on the business’s fiscal health, the economic cycle and its financial philosophy. And not every solution makes sense for every company.

When a software company recently needed to find a new way to expand, it had to reevaluate some of the fundamental aspects of its business. The firm operated two very distinct entities, each with its own unique growth and profit trajectory. After working with KeyBanc Capital Markets (KBCM), the company’s management realized that the key to growth was to operate each business independently, and KBCM helped them understand how to spin off one side of the firm into a separate entity.

There was one catch, of course: Money.

“They required approximately $75 million in capital in order to spin one of the businesses into a separate corporate entity,” recalls Terry Schallich, segment head of technology, corporate and investment banking at KeyBanc Capital Markets.

Schallich and his colleagues got to work to make it happen. They analyzed the company’s balance sheet to determine how much debt the company could afford to take on. Then the KBCM crew went out and marketed the debt to investors at the most favorable terms for their client.

“Six quarters later we took one of the businesses public, raising nearly $100 million,” Schallich says.

Capital Can Unleash Growth

Bootstrapping might make sense in the early days of a business. But mid-market companies often have greater capital needs than they can generate internally from cash flow alone.

“If you’re thinking about accessing capital through earnings, it could take years to put aside a significant chunk of organic capital,” explains Amy Carlson, managing director and head of debt capital markets at KeyBanc Capital Markets.

To be sure, some owners and managers may prefer that kind of conservative approach as it puts less strain on the balance sheet. Debt capital lets a company act right away on its strategic initiatives and, relative to equity, there’s no ownership at stake.

Eschewing new sources of capital could mean missing out on opportunities for growth. The software company example mentioned earlier is a case in point. Had the firm waited to build up a cash reserve, it could have missed out on an opportunity in the equity market.

“The founders had been bootstrapping, and their growth was impeded until we were able to come in and provide a holistic view and a roadmap we were able to execute on,” Schallich says.

One Size Doesn’t Fit All

When it comes to financing, one product or one solution won’t necessarily get the job done.

“If you’re a startup, your need for capital is very different than if you’re a $100 billion company,” says Dileep Rao, professor of finance at Florida International University and author of Nothing Ventured, Everything Gained: How Entrepreneurs Create, Control, and Retain Wealth Without Venture Capital.

“What you want to do is match your need for working capital with your sources of capital as much as possible.” Amy Carlson, KeyBanc Capital Markets

The software company that worked with KBCM, for example, used a combination of both debt and equity to achieve its objectives. Because of KBCM’s capabilities around different capital sources, the bank can make recommendations tailored to the business.

A company with less cash flow, on the other hand, might not be able to take on as much debt. Instead, it would need to adjust its business strategy.

“What you want to do is match up your sources and uses of capital as much as possible,” Carlson points out. “Our job is to figure out what that mix of sources should be.”

Companies in different industries have varying capital requirements, and a company’s need for financing usually evolves as it grows, says Rao.

Exploring the Options

An initial public offering, for instance, can allow a company to raise a significant amount of capital if the market conditions are favorable. But that also means diluting the ownership, and it brings more stringent reporting requirements, something that may not be appropriate for early-stage companies.

Since 1980, there’s been a trend for companies to wait on issuing an IPO until they are more established, with firms being an average of 11 years old at the time of their offerings, according to research from Jay Ritter, finance professor at the University of Florida.

“If you’re confident about your readiness to operate and report as a public company, then it can be a very compelling path to travel,” Schallich says.

Debt, meanwhile, can burden a balance sheet and some management teams may bristle at that. However, debt can cost less in the long term because founders retain their full ownership stakes—and therefore future profits. If a company stays current on its payments and other terms, lenders typically won’t get involved in the running of the company.

“Debt is one of the best types of financing there is if you know what you’re doing,” says Rao. That means understanding if your cash flow can support debt payments without placing an undue burden on other parts of the operation.

On the other hand, being the target of an acquisition can provide a critical infusion of cash. An acquisition deal can be structured so that the financial sponsor takes a controlling interest but retains management.

“It all depends on the situation at the time,” says Beth Mikes, managing director and head of corporate syndications at KBCM.

“And it depends on the markets.” Because there’s so much to consider, companies need an unbiased partner who has experience facilitating different types of financing.

“We are product agnostic,” Mikes says about KBCM. “It’s about what makes sense for the client.”

After years of sacrifice and hard work, business leaders shouldn’t let a lack of capital stand between them and the next stages of growth. With an array of capital solutions, mid-market companies have the opportunity to tailor their financing to their growth needs.

Which ones will you leverage to take your company to the next level?

KeyBanc Capital Markets can help your business find the financing options it needs to thrive and grow. Learn more at key.com/kbcm.

Disclosures

This article is for general information purposes only and does not consider the specific investment objectives, financial situation, and particular needs of any individual person or entity.

KeyBanc Capital Markets is a trade name under which corporate and investment banking products and services of KeyCorp® and its subsidiaries, KeyBanc Capital Markets Inc., Member FINRA/SIPC, and KeyBank National Association (“KeyBank N.A.”), are marketed. Securities products and services are offered by KeyBanc Capital Markets Inc. and its licensed securities representatives, who may also be employees of KeyBank N.A. Banking products and services are offered by KeyBank N.A.

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