KUHN CAPITAL Tuesday, March 20, 2018
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Capital, Where Art Thou?


For years now, Pepperdine University’s MBA program has been publishing the results of surveys that illuminate the financing circumstances of private business owners. The most recent data, published a month or so ago, were culled from over 10,000 respondents.

It’s fascinating stuff. For instance, what is the “cost” to private businesses owners in the US for various types of capital: bank loans; mezzanine debt; angel, VC or PE equity?

As expected, cash flow and asset-based bank debt is the cheapest of all (for a $10 million loan, about 6%). But getting it isn’t easy. Regulators encourage banks to make loans yet criticize them if they’re not of flawless quality. As a result, only half of the surveyed businesses who attempted to obtain bank debt succeeded in the past year.

Other forms of capital cost a lot more: for a company generating $5 million in EBITDA, a mezzanine loan (which can convert to equity) costs 20%. For a company with that EBITDA, PE capital goes for 30%. For an “Early Stage” company, a VC will charge 35% and for a “Start-Up”, angel capital will cost 40%. Topping the list, factors charge about 50% p.a. to finance $500,000 per month.

While they appear high, these costs actually don’t’ appear to have changed much this year versus prior periods. What’s new is how hard it is to obtain capital. Forbes magazine claims that big banks approve only 10% of “small-business” loans. Small banks are more receptive: they approve loan applications 44% of the time.

On the other hand, says Forbes, PE groups have been cutting way back on investments in businesses valued at less than $100 million. In 2007, they invested $22 billion in 637 companies. In 2011 through September they invested only $7 billion in 232 deals.

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