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Borrowing beyond the Banks

24 May 2018 3:53 PM - Ian Robinson

On the 20th September 1519, Enrique of Malacca kissed his family good bye thinking he may never see them again.  For he set off with his Portuguese master Ferdinand Magellan to sail to end of the world (and maybe off the edge).  In theory, the world was proven to be round… but yet to be practically proven as Enrique was soon to find out.

Borrowing money from the banks shares somewhat a similar fate to that of Enrique in the eyes of the economic community.  Is there a financial cliff beyond the banks, or is there a whole new world of finance where there is a full spherical spectrum of capital opportunities?



Strategic capital can be defined as capital that has been procured and deployed for a specific purpose to achieve a pre-determined outcome.  We all like to think that all capital is strategic and that we are masters of controlling our capital under management. 

In the world of business, capital is more commonly divided into two main camps: debt and equity.


Debt vs Equity

Debt capital provides both leverage and liquidity in a business on terms that need to be repaid.  Applied with discipline, it can create accelerated return on assets and investment.  Equity on the other hand is “sweat capital” or “risk capital” and is generally not repaid back to the investors in the normal course of business.  It is full participation capital that allows for ownership (and potentially management) rights within the business.  Applied strategically, the objectives can be achieved.  Applied with laissez faire and dilution of ownership or management or decreasing returns on investment, could be the result.  On a calculative basis, this dilution can translate into a very expensive form of capital.


The Cost of Debt

The banks provide the most cost-efficient debt capital in the market.  For the banks to offer “cheap” debt capital, they must operate at the low risk end of the lending spectrum.  It is common to see confusion in the market when borrowers believe they should be entitled to further borrowings from a bank, when in fact their activities are pushing them beyond the realms of normal bank appetite.

This is where the capital spectrum needs to be understood.  Beyond the banks is a realm of possibility that extends all the way to equity.  This is the capital spectrum which may consist of senior stretched, mezzanine, blended finance, hybrids being some of the more common structures that are noted.  ASX 50 companies comfortably move up and down the capital spectrum to secure capital for tactical purposes (M&A) to keep growing their businesses.

In industries such as farming, there is a capital gap between what the industry needs and what the banks can provide.  In many cases, the cost of non-bank lending, albeit higher than bank lending, can supercharge a business to the next level whereby the residual financial outcome exceeds that of the cost of capital deployed.  Consolidation back into mainstream banking could likely occur once the growth objectives have been captured.  The business then has the luxury of operating at a much higher level. 

From a strategic viewpoint, a business can potentially only go so far on reliance of bank funding.  By strategically moving across the capital spectrum, a business may bring forward expansion or trading opportunities that would otherwise be missed with reliance on just traditional lending.

Should you wish to know more about optionality beyond the banks, please make contact and we’ll be happy to enlighten you with expert knowledge and advice.

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