Desperately seeking capital? Where to go when your banker says 'no': the credit crisis may have constricted capital-raising opportunities through conventional means for private companies, but a new generation of financiers and investors is stepping into to fill the gap as the economy begins to recover.

• Author: Carter, Michael
• Position: Capital Formation

Following every credit crunch, a new group of financiers arrives to fill the financing void. Today, as the economy bounces back, this new group of financiers is led by experienced lenders and funded by proven investors. They have raised capital based on business plans using the same rationale as in past cycles:

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1. Sound middle-market companies are being starved for cash.

2. Commercial banks have gone too far tightening their lending standards.

3. Capital will be deployed for well-underwritten loans and investments to companies with a notch higher credit risk, enabling the lender to charge higher interest rates or seek higher investment returns by opportunistically taking advantage of the current lack of credit.

Privately held companies are typically very creative and resourceful in surviving tough economic times, but they are often challenged during the types of credit markets they're now facing. What is the senior finance executive of a privately held company to do? For starters, he or she must become educated on the types of risk capital. Before starting, two issues need to be understood and addressed:

* Usually the search for financing is precipitated by a rejection Of an existing bank relationship. First, request an extended meeting with your banker to learn why the company is not considered "bankable" from the bank's perspective. Although bankers are reluctant to convey the real reason for their decision, you should let them know their guidance is truly needed as you undertake approaching new sources of capital. The bank can be helpful in pointing you in the right direction.

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* Understanding why the company needs capital will determine what type of financing is most appropriate. Generally, the top reasons for seeking capital include growth, change in ownership, partial cash-out or internal cash flow issues such as growth of accounts receivable and inventory, changing vendor terms, capital expenditures, acquisitions, investments in infrastructure or a downturn in profitability.

When seeking capital, take the time to understand the true costs of different types of capital and the tools the financing sources are currently using to enhance yield. Some of the more prevalent tools now include LIBOR floors, prepayment penalties, collateral monitoring fees, equity kickers, unused commitment fees and restrictions on the availability of capital.

Following is an overview of the categories of lending sources for privately held middle-market companies.

Senior Lenders

* SENIOR DEBT--revolvers, term loans, equipment loans/leases and real estate loans. Most owners have relied on this market for funding from commercial banks, asset-based lenders and leasing companies. This market has improved dramatically for many middle-market companies, but remains tight for those with EBITDA...