When Debt Works Well: Unlocking Growth Potential for Middle-Market Companies

When it comes to financing, many business owners have a love-hate relationship with debt. However, for middle-market companies - especially those with annual revenues below $100 million - debt can be a real game-changer. So, when is debt a good thing? The answer lies in its potential to drive growth and create lasting value.

The Evolving Landscape of Business Financing

The financing landscape is rich with specialized lenders offering targeted solutions. Asset-based lenders provide loans secured against tangible business assets like plant and machinery and venture debt providers have become crucial for early-stage businesses, especially in the technology sector.

However, for middle-market firms private credit funds have been the real game-changer. These funds, where asset managers raise private money and deploy it through dedicated lending teams, now control approximately 50% of the debt market. Their rise represents a fundamental shift in how businesses access capital. Other significant sources of financing include insurance companies, Family Offices, and government bodies.

Timing is Everything: When to Embrace Debt

Knowing when to take on debt is crucial for mid-market businesses. The sweet spot typically occurs after a company has scaled and mitigated risks from its early stages. Initially, many businesses rely on friends and family funding during their startup phase. As they grow, they often seek investments from business angels and venture capitalists through various rounds (Series A, B, C, D). By the time a company is ready for debt financing, it should ideally have demonstrated profitability for a couple of years.

Exploring Debt Products: A Toolbox for Growth

Middle-market businesses can tap into an array of debt products designed to meet their specific needs. From traditional loans and overdrafts to revolving credit facilities which may be granted on a bilateral basis (where one lender is involved) or a syndicated one (where there are many lenders in one debt facility). They may make use of trade finance instruments like bonds and guarantees or Letters of Credit, the options are plentiful. For businesses dealing with higher risk, mezzanine financing offers solutions on a more structured basis. Additionally, private placements, typically provided by insurance companies, present opportunities for longer-term financing beyond what traditional banks usually offer. 

These products can be employed for various purposes. Companies often seek working capital support to ensure liquidity or engage in recapitalizations and refinances of existing debts. Mergers and acquisitions frequently involve using debt to fund buyouts through Leveraged Buyouts (LBOs) and Management Buyouts (MBOs). Even companies facing challenges in their trading performance can utilize debt restructuring as a strategic move to regain stability.

The Advantages of Debt: More Than Just Money

Why should middle-market businesses consider debt over equity investment? The benefits are compelling. First and foremost, debt is non-dilutive; it allows owners to retain their equity stake while accessing vital capital. Additionally, debt financing is often more cost-effective than equity since lenders charge lower interest rates compared to the high returns expected by equity investors who assume greater risks.

Moreover, debt financing tends to be less intrusive than equity investment. Lenders usually don’t seek board seats or observer rights; instead, they allow management teams to run the business independently while providing support from the sidelines. This fosters a collaborative environment where lenders aim for long-term partnerships with businesses—standing by them through both challenges and triumphs.

Harnessing Debt for Sustainable Growth

For middle-market businesses eager to unlock growth and create value, embracing debt can be a powerful strategy—if done thoughtfully. By understanding the diverse financing options available and selecting the right type of debt at the right time, companies can harness this financial tool to achieve their objectives while maintaining control over their operations.