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The Lending Landscape: Leveraging junior capital to fuel growth

Most businesses face a desirable dilemma – growth. But it often comes with growing pains. 

Expansion requires capital and finding conventional means of financing isn’t always cut and dry. Senior lenders typically prefer to support well-established businesses with positive cash flow and tangible assets. And equity takes a big piece of the pie for owners wanting to capitalize on their growth. So, what is a viable solution if your business needs more flexibility and access to alternate means of financing? Junior capital.

The lending landscape

Building a successful business means understanding the financing options available. Let’s break down the lending landscape:

Senior debt

  • The first layer of financing is senior debt. Senior lenders – banks and credit unions – typically offer lending based on your company’s hard assets and the strength of your balance sheet, usually a fixed loan, line of credit or mortgage.
  • Senior debt is secured in first position and can be less expensive than other financing layers but can lack flexibility and it can be difficult to meet the approval criteria.

Junior capital

  • Junior capital is the second layer of financing and it refers to subordinated-debt, mezzanine financing and minority equity. Junior capital takes second position security; it is more risk tolerant, flexible and offers more innovative ways to structure your business debt.
  • By acting as fuel for your company’s growth potential it expedites earnings without selling any or much ownership. Junior capital meets you in the middle – it lends like debt and listens like equity.

Equity

  • The third layer is equity financing – selling company stock to investors. Equity can be a strategy to find strong company partnerships however, it can be an aggressive and time-consuming process. With equity, you risk loss; investors take profits from your company as you grow at whatever price the equity was sold. The more money you make, the more money you give to your investors. Instead of interest, you sell parts of your company as payment – this can be expensive.
  • There is some overlap between equity and minority equity (part of junior capital). To clarify, you can sell minority equity to your existing junior capital provider. There are benefits to this such as dealing with a firm that you know and trust, a more streamlined due diligence process and it can potentially be less expensive as the junior capital lender will be more likely to share some of the upside with you, as they have the downside protection of a debt position.

David Hastie, Managing Director at First West Capital, describes junior capital as an excellent strategy for businesses that have strong cash flow and lots of growth potential. He emphasizes that flexible debt financing solutions allow clients to keep as much capital in the business as possible.

Why junior capital?

Junior capital can be the right alternative to senior debt or equity financing; a great example is our client AlterG®, creators of a NASA-developed Anti-Gravity treadmill®. Kevin Davidge, CFO, says that AlterG couldn’t live within the restrictions of its existing debt facility because there wasn’t enough flexibility to invest in the business expansion. As AlterG transformed by hiring staff, addressing marketing and operations tactics and expanding distribution channels, it required an outside the box financing solution – one that fit its business needs without limiting its growth trajectory.

Davidge added that financing from First West Capital gave AlterG the runway to execute on its strategic plan to grow the company. Without it, AlterG would have had to explore less attractive options such as raising more expensive equity capital or sacrificing expansion opportunities.

At First West Capital we see potential where others see risk; we work with established, emerging and expanding businesses when senior lending and equity financing fall outside of your business needs, or you need a mix of both. We value working together – it’s a team approach.

It’s a partnership

We work to understand your business model and financing needs – as well as you as an entrepreneur or business owner. Adam Bryk, COO and CFO at California Innovations, described the financing process with First West Capital to be personal and innovative and emphasized the importance of “fit” when establishing a partnership. According to Bryk the best partners are humble, reasonable and collaborative.

To us it’s an all-around partnership, not just a one-time transaction. We are complementary to your senior lender and work together with the use of an inter-lender agreement; this ensures an optimal and smooth transaction.

We’re in your corner

We know what it takes to be a growing and evolving Canadian business – because we’re one too. Our unique entrepreneurial perspective helps us understand your challenges and opportunities. From one growing business to another, we can help fuel your next steps now, and into the future.

If you’re curious about whether junior capital is the right solution for your business, connect with us. Let’s do great things together.