Growing companies often require additional funding to reach their full potential. In such situations, the management should decide whether they wish to retain their full ownership and use debt financing or sell a portion of their ownership to equity investor(s). United Partners Advisory can help the client to determine the optimal capital structure in case the client is unsure which form of funding would perform best for the company. If the client is not yet ready for a public stock or bond issue, United Partners Advisory can help and find private investors whose interests best align with the company’s needs. During our 15 years in operation, we have developed a wide network of investors that consists of high net worth individuals and entrepreneurs together with regional and international financial institutions.
Raising funds by selling a portion of ownership, compared to taking on debt, leaves the company with more free cash flow from not having to pay interest. This cash can be used to expand the business or cover operating costs. Selling a portion of ownership is more common among growing companies where the cash flow is not yet predictable enough to guarantee the company’s debt service ability in the future. The possibility of interest rate hikes creates additional uncertainty when considering an investment loan.
Equity investors can bring variety of extra value to the company in addition to funds. For example, experience and knowledge of entrepreneurship or sector, wide business network and financial acumen. It is important to keep in mind however that equity investor becomes a co-owner of the company who must be informed of anything of importance and who shall have the same decision rights as the founders.
There are three basic options when raising debt – the company issues bonds, takes a long-term investment loan or seeks bridge loan financing. It is important to understand that these options are not mutually exclusive, rather the best results are achieved by using a combination of the above that best suits the company.
Bond issue is a loan between the company and investor(s), whereby the investor agrees to lend a certain amount of money for the company and the company pays agreed interest for that loan. Bonds have maturity upon which the company will repay its debt to the investor. In the Baltic countries, 3-5 year maturities are most commonly used. The interest rate on bonds is usually higher compared to interest on investment loan for growing companies, however, the interest on bonds is fixed and therefore its effect on future cash flows is more predictable. When a company issues bonds, it retains its operational flexibility compared to an investment loan where the bank may heavily restrict company’s operations. In 2017, United Partners Advisory helped companies raise over 11 million euros in bond issues.
Bridge loan financing is used to strengthen the company’s short-term financial capability. For example, the company may need to build inventory prior to peak sales season, a quick closing is needed on distressed opportunities (such as auction) or the company may require financing for an interim before an IPO or acquisition. Bridge loan financing should be treated with care as it is a short-term loan with a high interest rate.