Raising capital is no easy feat. In fact, only 0.05% of small businesses and startups end up raising venture capital. While there are many financing options available, navigating the debt capital market is an attractive, albeit complex task for even the most experienced of entrepreneurs. With the help of Debt advisory firms, founders and business owners alike can more easily source capital and plan their financial futures.
Debt Advisory refers to professional help, whether it be through lawyers, accountants, financial brokers, etc., that support a borrower through one or more transactions.
Businesses may choose to consult debt advisory firms for guidance and resources for attracting private equity and other funding options. It may seem counterintuitive to bring on a new service when looking for funding; however, investing in advisory services can streamline the borrowing process and provide management teams with the tools for success.
Debt advisory can help businesses plan, negotiate, and source working capital. Without them, borrowers are left to navigate the confusing terrain of debt-related products on their own, each often requiring its own submission requirements.
Traditional lenders, such as banks, can take weeks and sometimes months to reach a decision, which means companies need to understand how long they can work with their current capital reserves.
When you consider that big banks have a 27.7% approval rate, meaning most applications will be rejected, it's clear that most businesses will require some help to ensure they get at least some funds.
Debt advisors and advisory groups lend their expertise, knowledge of market conditions and trends, and strong relationships to improve the borrowing process.
While each Debt Advisory firm will have its own processes and procedures, there are some common practices to expect.
You can expect to work with a debt advisory firm as follows:
Ideally, the debt advisory firm or group will take on the entire burden of obtaining funding from sourcing to close. The right advisor will reduce an organization's financial stress throughout the process.
It’s also important to note, however, that debt advisory groups can provide other related services. This includes:
Restructuring is a common service debt advisory firms provide that focuses on changing a client’s current structure of debt. This may be through converting some debt to equity or making changes to a current loan to avoid default. There is, however, often a price to pay for restructuring. This could take the form of higher interest rates or a one-off payment.
The ratio of debt a company has is found by dividing the total number of liabilities by the number of assets. There isn’t a “good” or “bad” debt ratio out there. It will depend greatly on a number of factors specific for each company. That said, low debt ratios tend to be around 0.4 or lower, while high debt ratios are anywhere around 0.6 or higher.
Once the decision is made to hire a debt advisory group, the next step is finding the best advisor to meet your needs. It's critical to have an advisor who understands your industry as well as the different financing options available.
Before hiring a debt advisory group, it’s extremely important to first do your due diligence.
There are really three things every management team should look for in a debt advisor:
Debt is a tricky thing for most businesses. It's true that debt and fundraising can help businesses reach the next level. But without a strategic focus, debt can become a significant burden.
Debt advisors offer advice not only in sourcing capital but also in restructuring and getting rid of debt. Even after a business snags a deal with an investor or a loan from a bank, keeping a debt advisor onboard can help businesses manage their debt appropriately.
At the end of the day, these advisory groups are an investment in your business, not just another expense. For founders and management teams who really want to take their business to the next level, whether that's through acquisition financing, an IPO, or applying for venture capital, debt advisors can lead the way to success.
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