Creative Financing for Debt Buyers

I just returned from the DBA Executive Retreat, where I participated in a panel discussion regarding creative ways in which debt purchasing companies can access debt and equity financing to purchase portfolios. Here are some common themes that were discussed regarding the best types of financing and how to go about accessing it:

Financing options are not the same for everyone – Small and/or first time debt buyers do not have the same accessibility to debt and equity financing as more established/larger debt buyers. However with the right business plan and purchasing opportunities, money is still available. Small and first time debt buyers should focus on family, friends and other high net worth individuals within their business networks for equity financing, and also leverage their local and regional banking relationships for debt financing. However, when raising equity capital from individuals, debt buyers will want to make sure that they are doing so in compliance with securities regulations.

In addition, certain small and large hedge funds may also be willing to finance a majority of the purchase price (up to 80-90%) if the debt buyer can finance the rest. Larger, more established debt buyers may have existing bank lines and equity relationships that they can tap into for future portfolio acquisitions or leverage their historical purchasing performance to secure new debt and equity financiers. Senior debt lines are much harder to come by in today’s market even for the largest and most successful debt buyers, but mezzanine lenders, hedge funds and special situation funds could be viable alternatives (albeit more expensive options).

Most financiers will want to crawl before they walk – For new financing relationships, most debt and equity providers will want to test the relationship first with a few purchases before offering a line of credit or equity for the business. Debt buyers will need to get the financiers comfortable not only with the purchasing methodology and sourcing capabilities (strong preference made toward direct access) but also their analytics and underwriting procedures, all of which will need to be maintained in written form for the financiers to review. Once financiers become comfortable, the debt buyers will likely not have to provide them with as much due diligence information.

Debt buyers need to create a business plan – Particularly when seeking equity capital, debt buyers will be required to create a business plan that details the company’s history and performance to date, the background and expertise of the management team members, the core competencies and key investment considerations of the company, and management’s expectations of the company’s future financial performance in the form of a three to five year financial projection with detailed assumptions. The business plan should show investors how the debt buyers are leveraging their previous experience to build a growing and financially rewarding platform going forward.

Some non-traditional financing alternatives – Larger debt buyers, international lenders and other accounts receivable management companies (e.g. collection agencies, debt collection law firms, etc.) were also discussed as viable sources of financing particularly for portfolios that they have experience purchasing/collecting. As prices have declined over the past 18 months more of these types of players have expressed interest in purchasing debt in the U.S. International lenders are particularly attractive particularly those in Europe due to the exchange rate benefits. However, they are difficult to access and require U.S. debt buyers to travel to see them.

Overall, the lending and equity markets are still accessible but require debt buyers to work harder to obtain financing than three years ago. However, debt buyers with proven management teams, defensible business plans and attractive purchasing opportunities should be able to source the financing they need in today’s market.

Mark Russell manages M&A transactions for Kaulkin Ginsberg. To confidentially discuss your business interests, please contact Mark Russell at 240-499-3804, or by email.