Lowering the cost of capital

Understanding the benefits of leverage

As part of lowering the overall cost of capital, you may want to adjust your mix of debt and equity by proportions that are optimized for changes in market conditions or in your business itself. Taking this step can open a number of strategic possibilities, including:

• Adding a new source of growth capital for your business. Debt is typically faster and cheaper to access than equity capital.
• Providing equity investors with a higher return on their investment. Debt combines historically low rates and tax deductibility to reduce its cost, so equity investors can benefit from the fixed costs of debt being used to concentrate higher returns toward their capital.
• Accessing owner liquidity. Owners looking to find liquidity from a portion of their equity or diversify their investments can often do so with increased leverage to free more cash from the business.

Determining optimal capital mix

Many factors determine the best capital mix—there’s no single static number that’s right for your business. Although there are industry rules of thumb, the optimal capital mix for a business fluctuates based on features such as the company’s performance and track record, its business cycle position and economic conditions, leverageable assets, and current interest rates.

While rethinking the ideal capital mix for your business, you may also want to do some debt housekeeping. Consider retiring loans with high interest rates or unattractive terms or consolidating loans and banking relationships for simpler management.

For example, let’s take a manufacturing company with roughly $20 million in annual revenue that worked with Truist to rebalance its capital. The company needed a new $3 million piece of equipment to maintain competitive parity and to address the cost and service requirements of its customers. In response, the company leaders increased debt as a portion of their capital mix to finance the equipment, understanding that the investment could grow their commercial value and, within a few years, align the capital mix with the business’s goals.

Adding leverage with real estate

Real estate financing is one of the fundamental methods that small and medium-sized businesses use to add leverage to a capital structure. That’s because growth often results in expanding facilities. Plus, 56% of leaders will need more office space by 2024.^{Disclosure 2}

Determining whether to lease or buy your facilities is an important decision. One major consideration may be how a purchase will help you control operating costs and lock in advantageous locations. Take a closer look at the status of your current leases; leasing, buying, and selling market conditions for commercial space; timing to move, and the impact a location change might have on customers and employees.

If owning real estate makes sense for your business, obtaining a commercial loan on owner-occupied business property, or real property, is a common method for adding leverage to your capital mix. Real property provides well-understood loan security for the lender, an additional asset type to your company holdings, and an appreciation upside. All of these benefits accrue to the company without equity dilution.

Furthermore, instead of having the business take on debt, business owners can also choose to do so personally. By buying real estate and leasing it back to the company, the owner naturally diversifies a concentration in company stock. When the owner transitions, lease payments will present the company an available income stream along with access to real property appreciation.

Working with your Truist relationship manager

Before making any changes to capital structure, remember to align major decisions with your strategy.

To make the most of your capital mix and achieve your leverage goals, your Truist relationship manager has the knowledge to lend valuable advice about capital structure and help you find the best ways to use real estate. Along with other advisors—your management team, accountant, lawyers, financial experts—your relationship manager can initiate the debt financing to meet your capital mix and business goals.

Finding the optimal capital structure for your business is a smart strategy for success. Leaders can get started by determining the right capital mix, understanding and adding leverage, and working with financial experts along the way.