Business Financing in 2019
Ready access to financing is the cornerstone of the capitalist system. This is whether an entrepreneur wants to start, buy or grow their business. Without capital, there is no future for the entrepreneur or their business.
There are different lenders or borrowers a privately held business or owner can approach to borrow money. What may not be readily understood is that different lenders have different criteria to approve a loan.
Pepperdine University inconjunction with their Graziadio Business School provides academic education on how the economy, finance, and more effects privately held businesses. As a graduate of the Graziado Business School and their Certificate In Private Capital Markets (CIPCM), I am able to participate and get access to their research and analysis of privately held businesses.
What is happening in Private Capital Markets?
Since 2007, the Graziado Business School have put together the Pepperdine Private Capital Markets survey. For 2019 this was conducted in January 2019 with the results of their survey now available.
The 139-page report they put together comes with a huge amount of detail.
Here are some of the highlights from the report.
Required Rates of Return
Investing money in a privately held company for the lender is mainly about managing their risk.
Different lenders invest in different segments of the economy.
If you are looking to borrow money, there are different lenders for different situations. Here is a simple summary of the different type of lenders and their median required rate of return.
|Lender||Typical loan amount||Median Rate of Return|
|Asset Based Lender||$1 million||15%|
|Asset Based Lender||$5 million||5.8%|
|Asset Based Lender||$10 million||5%|
|Asset Based Lender||$50 million||4%|
|Mezzanine Lender||$5 million||15%|
|Mezzanine Lender||$10 million||13.5%|
|Mezzanine Lender||$50 million||13%|
|Private Equity Group||$1mm EBITDA||37%|
|Private Equity Group||$10mm EBITDA||25%|
|Private Equity Group||$25mm EBITDA||22.5%|
|Private Equity Group||$50mm EBITDA||21%|
|Venture Capitalist||Early Stage||33%|
|Venture Capitalist||Later Stage||28%|
|Angel Investor||Early Stage||30%|
|Angel Investor||Later Stage||28%|
Annual return expectations for new investments
The graph below shows the range of annual return the different classes of lenders expect on any new investments.
The annual return varies from 4% to 12%.
If you own a privately held business and are looking to borrow for your business, understand the different annual return requirements from the different lenders you approach.
Bear in mind that different lenders expectations relate to the risk they perceive in lending money.
What industries provide the best risk/return?
This should be of little surprise.
The industry that provides the best risk/return is Information Technology followed by ‘other’ and then followed by manufacturing, business services and basic materials & energy.
Geographic Regions in the US Offering the Best Risk/Return
The West Coast provides the best risk/return tradeoff for the 8 different regions in the US.
Issues of highest concern to privately held businesses
This is an interesting summary as it provides the issues of concern to privately held businesses.
The issues in blue are current issues while the issues in red are emerging issues.
The current issue of greatest concern to 43% of the respondents was economic uncertainty.
The emerging issue of greatest concern to 33% of the respondents was political uncertainty / elections.
Reason for Declined Loans
If you are looking to borrow money for your business, there may be many reasons why your loan application may be declined.
Here is a summary of those reasons.
The information in this report shows that if you are looking to borrow money for your business venture it helps to understand the amount you wish to borrow and the best type of lender to approach to secure the money you need. This report also shows what sort of interest rates you can expect to pay as each lender has a different set of criteria, or indeed, willingness to lend in the first place.
Ready to value or sell your business?
Are you thinking about selling your business? The first place to start is to know the value of your business. If you would like more information about valuing your business, please visit my website Business valuation.
For more immediate help about selling or valuing your business, please send an email to Andrew Rogerson or give me a call on 916 570-2674.