Financing alternatives for SMBs.

• Author: Marks, Kenneth H.
• Position: Private companies

Many companies with revenues from a few million to several hundred million dollars have experienced tough business conditions since early 2008. And though it'll likely be a while before returning to what's considered "normal" market conditions, there are viable financing sources for these small--to mid-sized businesses (SMBs).

In response to the tough environment, SMBs have trimmed costs and become more efficient. They're now trying to grow or hold their own. Their banks have likely tightened the reins on available credit and taken a more conservative posture. Thus, finding the right capital depends on having a solid, well-thought-out strategy and operating plan and a strong management team.

With the fundamentals in place, investors or lenders that align with the type and horizon of funding required for specific businesses can be found. Here are five sources of capital to consider:

1. Asset-Based Lenders (ABLs)

   There is a wide range of ABLs--starting with commercial bank-owned lenders that lightly monitor collateral to very aggressive loan-to-own privately held financiers.

   Most likely, the bank ABLs are going to be nearly as tight as their corporate finance counterparts, given that they have some of the same regulatory pressures and risk aversion. Nonbank, non-regulated asset-based lenders are a more likely source as they can tolerate higher debt leverage ratios and an inconsistent earnings history.

2. Growth Equity

   For initiatives requiring permanent capital, growth equity may be an appropriate alternative. Growth-equity funds make up a minor percentage of the total population of private equity investors. Growth-equity investors can be thought of as being at the intersection of venture capital and noncontrol private equity funds in their appetite for risk balanced with cash flow and control.

   These investors are looking for operating companies that have revenues, a proven technology or service and proven market demand. Growth-equity investors will fund operating losses if the company is in a growth or expansion mode and where the losses are an investment in capturing market share or long-term customers.

3. Mezzanine Capital

   Mezzanine funds are similar in their positioning in the world of private equity relative to growth equity. However, their investments are primarily in the form of subordinated debt with an equity kicker (warrants to purchase stock) that allows them to participate in the value growth of the business.

   Mezzanine is thought of...