For many business owners and CFOs, the trade-off between equity and debt funding can pose a significant dilemma.
What is the most effective way to fund growth opportunities or restructure the business without sacrificing equity or operational control of the company?
Some businesses have traditionally assumed raising equity is the only or easiest path to accessing growth enabling capital.
Thing have changed.
The growth of private credit options means that businesses can now access a wide range of debt structures to help them preserve ownership, maintain strategic control and accelerate growth opportunities without diluting equity in their business.
This was a major theme emerging from a recent ScotPac-sponsored panel of industry experts – Growth Without Equity Dilution: Funding Australia’s Next Phase of Mid-Market Expansion, hosted by Private Equity Media.
Private credit is fast becoming a key consideration for businesses needing to implement a funding solution.
Growth of private credit enabling differentiated debt funding solutions
The private credit market in Australia is estimated to be worth over $200 billion. Asset-backed lending/securitisation is estimated to comprise between 10% and 30% of that total.1
And as traditional banks tighten cash-flow lending criteria and impose restrictive covenants, asset backed lending has emerged as a key private credit funding mechanism for mid-market businesses and SMEs alike.
For example, according to the ScotPac SME Growth Index Report, 49% of SMEs have adopted asset-based lending solutions within the past two years, including 26% who entered the market in the past 12 months alone.
This strong momentum is expected to continue with 28% of SMEs planning to adopt an asset-based lending solution in the next year, led by larger SMEs seeking more scalable and flexible funding structures.
This growth is being driven by a combination of regulatory changes and shifting market dynamics.
Increased capital requirements have resulted in Australia’s major banks becoming significantly more conservative. In response, a sophisticated private credit sector has evolved to fill this gap.
Supply chain volatility and extended payment terms have also resulted in assets becoming trapped in accounts receivable, plant equipment, and inventory. Asset backed lending can directly monetise these balance sheet items.
As interest rates continue to rise and equity dilution carries a premium. Asset backed finance solutions can command a lower risk premium and more favourable pricing than unsecured facilities.
Flexibility remains key
While pricing is important, flexibility is becoming more valuable in implementing a structured financing solution.
Many businesses are prepared to pay slightly more where a funding partner can provide sufficient capital, faster execution, fewer covenant constraints, greater structural flexibility and specialist industry expertise.
For ScotPac, this last point is critical.
We have deep expertise across various sectors. That gives us greater confidence to be able to implement a funding solution which gives our clients enhanced liquidity when they need it most.
For example, one client which was owned by private equity was looking to acquire more assets in the same sector. Their existing debt accordion facility was not able to stretch to facilitate the opportunity.
ScotPac’s knowledge and expertise within that particular sector meant we were able to provide a debt funded solution to the business which enabled them to fund the acquisition opportunity while minimising any associated equity dilution.
It was also a covenant light solution that was implemented with the speed and flexibility that their existing banking syndicate could not match.
Taking back control
For many businesses, a well- structured private credit solution can replace equity raising dilution by turning non-cash assets into functional liquidity.
Valuable capital can often sit idle on companies’ balance sheets, tied up in invoices, equipment, inventory or other assets.
A flexible solution such as ScotPac’s Asset Based Finance can allow businesses to leverage a combination of these assets – including inventory, debtors, property, plant and equipment – within a single flexible funding structure designed to improve liquidity.
It’s a relevant solution whether a business is facing working capital pressures, restructuring challenges or economic uncertainty or pursuing acquisitions, expansion and growth opportunities.
Increasingly, we are seeing this solution being incorporated into:
- Acquisition funding
- Private equity transactions
- Corporate restructures
- Buy-and-build strategies
- Shareholder liquidity events
In addition to minimising equity dilution, other key benefits of an asset-based finance solution include:
Simplicity: One facility, single monthly review without the need for multiple products.
Flexibility: Businesses can blend debtors, inventory, property, plant, and equipment into a single security pool for greater capital availability.
Speed & Control: Technology-driven assessments deliver rapid approvals and ongoing monitoring.
Business-Friendly Terms: Minimal covenants, pragmatic compliance, and fewer restrictions compared to traditional bank funding.
Immediate Liquidity: Converts dormant assets into actionable funding, empowering businesses to seize new opportunities.
Adjacent Private Credit Solutions
Businesses can also consider other private credit solutions which can also provide funding capacity without diluting equity in the business.
These include invoice finance, equipment finance and supply chain finance.
The message is clear. The significant growth of private credit means that businesses can now implement a viable debt funding solution to minimise equity dilution.
While raising equity will always have some role in the overall funding envelope, the growth of structured debt solutions means that businesses now have a greater choice of funding options geared to their own unique circumstances.
That means a business can fund growth without sacrificing equity ownership, leaving the business upside entirely in the hands of the current shareholders.
How ScotPac can help
ScotPac has almost 40 years’ experience supporting businesses through changing economic and trading conditions. Our specialists work with businesses to understand their complete operating cycle – including supplier terms, stock lead times, customer payment patterns and currency requirements.
ScotPac combines the significant funding capacity and reliability of an institutional lender with the flexibility and responsiveness of a specialist financier. This distinctive approach enables us to provide customised, asset-backed solutions for even the most intricate transactions, including mergers and acquisitions, capital raisings, and management buyouts.
Talk to your broker or contact ScotPac directly to learn more.
