Video: What are the Benefits of Senior Debt Capital?
Companies often choose to use senior debt capital because of the variety of advantages it offers over other types of capital. Here are 5 key benefits of senior debt capital:
1. Cost – Senior debt capital is a cost-effective way to finance a company. It is the debt in a capital structure that gets paid first, so it is less risky from a lenders point of view, making it the cheapest form of funding for a business. Because of this, senior debt capital is a practical choice for financing operations as well as more strategic initiatives. If a company takes on low cost debt and reinvests it into relatively high return capital projects, they are going to create more value for the business.
2. Growth – Senior debt capital allows a company to invest in its business in excess of cash-on-hand. When a company is growing rapidly, they are typically consuming capital as opposed to generating cash flow, thus, they don't have extra cashflow to invest. However, bringing on a senior debt capital partner can enable companies to pursue growth opportunities that they may not otherwise be able to, such as making an acquisition.
"Senior debt capital can add value to a company mainly in that it allows a company to continue to invest in its business, in excess of the cashflow that's coming off of the business." - Brooke Ansel, Director, Prudential Private Capital
3. Control – As opposed to taking on equity, senior debt capital allows a business owner to invest in their business, continue to grow and add value to their business, while also maintaining ownership.
4. Flexibility – Senior debt capital has the flexibility to be sourced and placed on standby for the unexpected, whether it's in the form of a revolving credit facility or a shelf facility. It is important for companies to maintain liquidity for the known and for the unknown.
5. Volume – The senior debt market is the largest of all the capital markets. As you work your way down the capital markets into more junior levels of capital, there is simply less capital available. The capital markets are the deepest and most liquid at the senior debt level because that is where most dollars are invested by institutional investors and banks. Thus, companies can access deeper pools of capital from the senior debt market.
If a company is going to substantially increase in scale, they need external capital, and utilizing senior debt capital is the most affordable, flexible and effective way for them to improve the growth rate of their company, while maintaining control. Additionally, your senior debt lender should be there for you for the operational side of the business but also as a financial partner to help you grow and support you over the long term.