Lee: Small business resources beyond the federal stimulus

With all the businesses that are struggling right now due to COVID-19, I am often asked what options are available for businesses to access capital, outside of the stimulus money that for some businesses is a “Band-Aid” for a much larger capital need.

My first response is to seek the cheapest form of capital, which is typically a senior loan backed by some form of collateral from a bank; however, some businesses have capital needs that traditional senior loans can’t solve.

Banks are currently dealing with an unprecedented volume of loan requests, including loan modifications related to the crisis, as well as stimulus loans made available through the CARES Act, a $2.2 trillion relief package that includes emergency grants worth $10,000, loans of up to $10 million and paycheck loans to keep employees on the payroll.

Whereas most businesses have an existing lending relationship, most are far less familiar with the private capital markets that exist to solve businesses’ capital needs beyond the capabilities of a traditional bank.

Some private capital alternatives to senior loans include second-lien loans, subordinated loans, bridge loans, and various forms of equity investments.

The private capital markets consist of private equity firms, private debt firms, non-bank lenders, bridge lenders, family offices, insurance companies, hedge funds, Native American tribes, and others. A vast majority of these groups have a large amount of capital, or committed capital, and are seeking outlets to invest those funds.

In reality, the private capital markets participants’ desire to deploy capital has always been there. There is an estimated $1.5 trillion USD committed to private equity and private debt firms that must be deployed (“dry powder”).

This staggering amount of committed capital means there is an unprecedented amount of competition to deploy capital and earn a return for investors. As the supply of investment opportunities has not kept pace with the dry powder available for investment, the valuations these capital providers have paid to invest has skyrocketed in recent years.

Once they are made aware of the capital options, most business owners’ typical follow-up question is, “When is the appropriate time to begin talking with these private capital markets participants if I need help?”

I tell everyone the sooner a business can begin considering its options and discussing with capital providers, the better.

You can always slow things down if you begin the discussions too soon or if your capital needs change; however, it’s much harder to speed things up if you wait too long without putting the business in a poor negotiating position.

If a business has relationships with people in the private capital markets and knows the amount and type of capital needed, it should reach out and begin those discussions now. If not, it should have a discussion with an investment banking firm that can help. It may seem daunting, but this can be a very seamless process if you know the terrain.

Christopher Lee is a managing partner of Infinity Capital Partners LLC and Infinity Capital Securities LLC, Member FINRA.