Raising finance

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In today's business environment, receiving financing can become difficult and start to impact operations. Consequently, it is important for business to look for innovative methods to get financing.

How Grant Thornton can help

Funding is essential to businesses at every stage of the company's life cycle, helping to support growth from incorporation to IPO, and it is often a challenge for Israeli businesses.

Our team has helped both private and public shareholders, as well as management teams to use debt and equity to release value, refinance, and support growth. We help you throughout the entire process from recommending appropriate forms of finances until negotiations are complete.

We help you:

• Navigate the market while staying true to your requirements
• Evaluate business plans, including analysis of the funding demands
• Improve funding propositions to potential investors and help present them
• Prepare and present financial models to potential investors including a detailed sensitivity analysis of the conditions on the financing
• Judge the willingness and terms for funding by using our relationship with investors
• Benchmark the pricing and terms

Types of finance available

When trying to raise funds for any purpose, it is important to look at alternative funding options instead of just using bank debt.

With a huge variety of choices available, it becomes difficult to understand which is the most fitting for your business.

Assistance could help with exploring the advantages and disadvantages of each option, so your business can be equipped with the best financing.

Asset-based lending

Asset-based lending (ABL) is raising funds from a company's assets, mostly its debtors. When your company has valuable assets like equipment, buildings, and inventory, it can use these assets for ABL.

This lending option is the best when unsecured loans from banks or other lenders have high rates or aren't accessible. Businesses might use ABL to raise funds for current capital needs including: equipment and stock purchases, restructuring, expansion plans and acquisitions.

Advantages and disadvantages

An advantage is that ABL is a cheaper and faster way to raise capital while continuing to grow the business. This credit is also flexible because it is asset-based and enables businesses to remedy gaps in cash flows that result from the timing of cash flows. Another advantage is that the ability to borrow funds grows as the business expands, opening up possibilities for the future. 

The downside is that if the company is unable to pay back the loan, the lending company can seize the asset used for the loan. Additionally, when the value of an asset tied to ABL fluctuates it can cause the lender to re-evaluate. In the case that an asset has decreased in value, the lender could reduce its exposure.

Mezzanine debt

Mezzanine debt is long-term equity and debt financing combined. It includes preferred equity securities like warrants and stock options which are secured, but are usually subordinated to the bank. This mezzanine financing is riskier for the lenders than ABL, so they will want a higher rate of return. Although, this rate of return will be lower than just an equity investor.

Providers of mezzanine financing include large institutional investors such as private investors, pension funds, and banks through specific mezzanine funds.

Advantages and disadvantages

Mezzanine debt is flexible in that it allows businesses to receive loans alongside equity investments, so the business doesn't have to give up large amounts of equity or take on large loans. The feature makes it the preferred choice for actions that require large amounts of money like expansions and buyouts. It also makes it a great choice for smaller companies which don't enough access to capital through traditional sources.

Although, mezzanine debt can restrict the loans a company can take on in the future. Lenders will usually include limiting terms in the loan agreement.

Grant Thornton’s credentials

Grant Thornton has worked on a variety of financial restructuring plans for businesses including mezzanine debt. We work to create plans for stable growth and business turnaround with directors, shareholders, and other interested parties. We have a successful track record of solving diverse, complex, highly leveraged and urgent scenarios and advising business with different levels of capital structure.  

Leasing

Leasing, also known as asset finance, is when a lessee pays a fee based on the length of time they use the company's asset such as machinery. Leasing helps the company raise additional cash from an asset instead of just selling it. In finance leasing, companies usually lease the asset for most of its useful life. In operating leasing, also known as contract hire agreements, the asset is returned to the company.

Advantages and disadvantages

Leasing to raise capital is another way businesses can fund expansion or change its capital makeup.

One way to change its capital structure is through leaseback, which is selling an asset and the leasing it back for a long-time which frees up capital. Leasing allows for better budgeting, management of cash flows, and the elimination of large initial capital outflows because of its consistent payments. Additionally, leases can be done on longer terms than bank loans and its cost can come from earned revenue. The type of lease agreement is important because it determines who owns the asset at the end of the agreement, potentially making a favorable or unfavorable lease.

Grant Thornton’s credentials

We have worked with secured and unsecured consumer finance as well as elaborate big-ticket leasing. Some examples are rental, vehicle contract hire and fleet management, equipment leasing and captive finance houses. We are able to manage the transaction and give specific recommendations to each sector throughout each stage of the process:

• Strategy
• Create connections with finance providers
• The business plan
• Financial modelling and scenario planning
• Negotiations with investors
• Deal structure
• Tax advice
• Shareholder structure and incentives

Bank debt

Businesses usually look to banks first when needing capital or advice. The two ways to borrow money from the bank are to take out a loan, or to have a short-term period of overdraft to adjust for the timing of cash flows. Bank loans can be unsecured, or secured against a valuable asset like property and equipment. Like with all debt, the principal and interest on the debt will need to be paid back.

Smaller companies usually use banks as their only source of funding, but for larger companies, bank financing is only one component of their total funding. 

Advantages and disadvantages

One of the biggest advantages of bank loans is that they are easily accessible if the company can present a well-developed business plan and offer collateral for the loan. Another is that once the loan is approved, there is little work needed to retain the financing.

When it is tax time, bank debt has its advantages. The interest payments on the loans are considered business expenses and will result in your business paying less in taxes. Thus, the actual interest rate would be lower than the bank’s stated rate.

Looking at the downsides, rates could still be high on bank loans if a business has bad credit ratings which could hurt cash flows. Furthermore, if the business has hard times and defaults, the bank frequently has the first claim to the company’s assets ahead of its shareholders. Thus, getting professional help for business and tax implications of using bank debt is important.

Grant Thornton’s credentials

Grant Thorton’s services cover a wide range of needs around immediate and longer-term funding requirements. These are:

• Introductions to investors funding other companies
• Assessments of the qualitative and quantitative merits of funders’ offerings
• Running the sensitivity analyses required by banks
• Assistance with business plans
• Tax and accounting advice
• Dealing with funders’ doubts and preliminary due diligence
• Operational modelling for annual operational reviews for larger funding packages

High net worth investors

Family and friends that may have helped initially finance a business are likely to not be enough soon after the start-up grows. In this case, it may be helpful to look for high net worth individuals who can fund its growth.

These investors would be interested in investing mainly for two reasons. To increase their investment returns because they believe the company will outperform or to use its synergies with another business the investor may be invested in.

Advantages and disadvantages

Individual investors can offer short- or long-term funding. Having a high-net-worth individual  is extremely helpful to private companies that are at early stages of development, or if they need a lot of cash to grow quickly.

The downside is that this option may cost a lot if you want to maintain the independence of your board. The investor will try and get a large return on their investment and may demand a stake in your business. There can be benefits to this situation, as having a partnership with the right investor could lead to the investor providing skills or advice to the management team.

Although, when high net worth individuals invest indirectly through funds and other vehicles, they will be more passive when it comes to the company’s actions similar to an institutional investor.

Grant Thornton’s credentials

We have expertise in working with companies who are trying to find the right investment. We also help high net worth investors navigate taxes and financial vehicles to best help with their growth strategy.  

Government grants/incentives

Grants are an avenue for the government to fund projects and initiatives that provide public services and to stimulate the economy. Grants often support innovative research, important recovery initiatives, and other programs.  

Advantages and disadvantages

One of the unique aspects of a government grant is that the money may be non-repayable. This is part of the government’s actions that show it is more willing to take on risk from start-ups and small businesses than banks and other investors.

Resources are available to companies in any field, such as healthcare, education, and science, etc. that are trying to find financing. Some grants even have no limits on the number of applications a company is able to submit.

Grant Thornton’s credentials

Grant Thorton Israel created a unique Innovation & Incentives Department which helps companies get R&D grants from a wide selection of governmental agencies including Israel Innovation Authority, Horizon, International Cooperative Arrangements, Eureka, etc. The department has sophisticated experience in corporate financing related to every stage of a company’s life cycle, a wide variety of technological fields, and a variety of other industries including: medical equipment devices, cyber security, agriculture, information technologies and communications, aviation, energy, transportation, control systems, etc.   

Private equity and venture capital

Private equity funding is investors making long-term equity capital investments in a company in exchange for shares, a percentage of ownership in the company, and sometimes a seat on the board of trustees.

Private equity can be used to support MBO transactions or provide equity capital to assist a business’s growth plan.

These investors are usually funds seeking high-potential companies to invest in, and they are typically long-term funds looking for capital growth. They expect to receive large profits since the investment is riskier because it isn’t public. 

Advantages and disadvantages

Businesses are often reluctant to give so much of their ownership away through private equity, but it is important to look holistically. If the business is likely to experience rapid growth because of the investment, then the smaller piece of equity the business has could become much more valuable, making the tradeoff worth it.

Additionally, if the company needs capital but is not ready for an IPO, private equity may be the best option. Private equity deals usually put the most importance on a 5-year time period until shareholders seek an exit. The company can immediately put the money to work to develop or improve the business.

Another advantage is that these investors have many contacts with commercial and strategic expertise that could contribute to the business’s growth. The private equity investor has an interest in improving the business because they will earn their return on their investment when they sell their stake. The company benefits from this situation because of the shared financial effects without taking on personal debt risk.

Since the investor has a shared financial responsibility, they will want to see every part of the company's business, including its forecasts, results, and skills and experience of the management team. This process is time-consuming with continual reporting requirements to the investor, and there can also be initial legal issues.

Grant Thornton’s credentials

Grant Thornton can guide business through all parts of private equity deals including the process, initiating meetings with funders, creating business plans and financial models, product management, negotiation, tax and deal structure.

Equity capital markets

In Israel, the equity capital market (ECM) is The Tel Aviv Stock Exchange (TASE). It is the only stock exchange in Israel. TASE is important for the Israeli economy and the nation's economic growth. ECMs are systems that allow companies to be traded by the public and to raise equity capital from private individuals, pension funds, financial institutions, and any other group which can trade on the exchange.

Sometimes, Israeli companies look to raise capital outside of Israel by listing on another ECM in addition to TASE. Some popular destinations are the AIM market of the London Stock Exchange and The Nasdaq Stock Market.

Advantages and disadvantages

Public markets provide a way for companies to raise money to enhance their business and grow. Benefits from gaining access to the public market are availability of capital, creating a market to enhance the ease of access, allowing the company to use quoted paper as means to make acquisitions, increasing company awareness, enhancing company status among supplies and customers, and consistently providing a valuation of the business.

With being public comes a need for more transparency and being accountable to external shareholders.

Grant Thornton's credentials

Our advisory department can help businesses determine whether it is best for them to go public. If it is, we would help determine the best fitting ECM for the company. Our Capital Markets team can execute the transaction and help prepare the Israeli companies for the floatation process.

We can assist with:

• Analyzing the merits of flotation as a financing solution
• Conducting a pre-flotation grooming process
• Choosing the right professional advisors
• Monitoring the entire process

Why do you need to finance?

Companies need to raise capital for a variety of purposes like funding growth through a joint venture or acquisition, refinancing current debt or to support a change in business operations or strategy.

The purpose of raising funds will be part of determining the preferable type of finance. What you should consider is:

• What is the length of the financing term?
• Is the financing option risky?
• How are you looking to interact with your potential funder?
• What do you want the costs and benefits from the financing to be?

RECOVERY & REORGANISATION

Restructuring and recovery of businesses

• Analyzing the business activity and dividing it into profit centers
• Producing recovery and efficiency plans
• Reorganizing the business and operational areas of a company based on a recovery plan
• Creating a forecasted cash flow statement (monthly and daily)
• Restructuring debt contracts with vendors and banks

Management of receiverships and liquidations

• Management of receiverships and liquidations
• Appointment of special executives
• Management of company during bankruptcy proceedings
• Checking repayment capability and capacity to meet financial obligations
• Accounting supervision, ongoing monitoring and control