In the situation with the printing company LBO, the management, and historical financial performance represented a moderate to low risk. Essentially, this information security consulting firm has developed a service that has excellent scalability with very low overhead. Sales could quickly reach several million dollars. This was a big leap of faith for us. If there are no sales, however, the consulting company should have the ability to handle the leverage that we put in place.
Banks sometimes finance companies that have good cash flow but insufficient collateral.
In a competitive environment when banks are looking for customers, they are more willing to take risks. Recently, there has been some indication that the banks are beginning to pull back and tighten their underwriting, in which case they are more interested in finding ways to reduce the risk. Aside from direct competition, perhaps our greatest challenge is raising awareness. Most business owners know what a line of credit is and why they need one, but very few know what mezzanine or subordinated debt financing is or how it can be a valuable financing solution. The firm s current owners may consider the long-term cost of an equity investment to be too high.