Want to maximize the value of your business? One key lever that's sometimes overlooked is capital efficiency.
The right capital mix will ensure that you’re maintaining an appropriate level of debt that enables you to meet your financial goals.
Opportunities for capital restructuring
Capital restructuring balances your debt/equity mix by adding, retiring, or reissuing debt to reach an ideal range. What’s an ideal range? It depends on the size of your company, industry, capital intensity, cash flow, and other factors—speak with your Truist relationship manager to learn more.
If your debt-to-equity ratio is at the low end of your ideal range, you’re using too much equity and not enough debt, which will reduce your return on equity since equity holders expect a higher rate of return than lenders. Your company could also miss out on debt tax advantages.
If you’re at the high end of your ideal range, you’ve lowered your capital costs, but you’ll have little room to adapt if the economy sinks or your business goes through a downturn. You may want to consider lowering your debt and the accompanying risk of repayment.
Restructuring capital can help you manage risks, including interest rate risk. Caps, collars, and swaps of floating rates for fixed securities can reduce your exposure to rate changes.
The best time to restructure your capital is when interest rates are low. You can lower debt costs and repayment risk while freeing up capital to fund growth. If you’re thinking about selling your business or transitioning, a debt-to-equity ratio close to your ideal range will make your company more attractive to investors or buyers.
When to restructure
Capital restructuring can benefit your business in a variety of ways.
- Undercapitalized companies looking to expand – Do you have unused debt capacity? Use financing to find the cash you need to expand your operations and put capital to work generating returns.
- Owners getting ready to retire – With dividend recapitalization, you can get additional liquidity from your business. Use dividend payments as debt to pay retiring owners or exiting investors. An employee stock option plan (ESOP) uses a similar mechanism to secure debt to fund owner liquidity.
- Companies looking to stabilize their financial structure – To retire excess debt, consider low interest loans to reduce cash flow demands and help your bottom line.
- SBA-eligible businesses – Restructure your company’s ownership with an SBA 7(a) [link to Truist product] loan to finance goodwill. SBA loans offer favorable down payments and rates.
- Stable companies looking to buy back equity – Use debt financing to repurchase equity sold during a growth phase.
How to restructure
There are two methods for restructuring capital:
- Rationalizing leverage – Refinance existing loans or obtain new ones using real estate, equipment, and receivables—or in select cases—future cash flows as security. Free funds for growth by refinancing to lower-cost capital sources.
- Equity buyback – Swap equity for debt by purchasing your company’s previously issued stock with debt financing. You’ll boost your return on equity while shifting to low cost and tax-deductible debt.