January 25, 2018

How MSPs / VARs Use Non-Dilutive Debt Capital to Grow a Business

As many MSPs / VARs strive to grow their business, evolving from a small to a midsize company often requires capital.  MSPs / VARs need capital for acquisitions, geographic expansion, infrastructure, personnel, or to bridge the gap between paying for goods and services, and the time they actually receive payment from their customers. Regardless if your company is in its early or late stage, it will probably need capital to grow to its full potential.  Early-stage company capital needs typically result from rapid growth and expansion, whereas more mature businesses are pursuing growth by investing in infrastructure, acquisitions, technology, and personnel.


Many MSPs / VARs are unaware of the capital available to them.  While capital comes in several forms, debt is often used as a way to expand a business. Many MSPs / VARs prefer to use debt instead of equity because it minimizes dilution while maintaining liquidity. Let’s briefly discuss the most common forms of debt available.


The first major distinction is whether the debt is senior or junior. Senior lenders have priority of repayment in the event of default, and therefore, assume less risk than junior debt providers. Examples of senior debt providers are commercial banks and asset-based lenders (ABLs). Although there are a wide range of products offered, the most common include revolving lines of credit and term loans. Revolving lines of credit are typically formula-driven and secured by a specific asset, such as accounts receivable or inventory, and provide limited borrowing ability based on levels of the underlying asset. It is common for senior lenders to place a first position blanket lien on all assets of the company to protect itself in the event of default.


Junior (aka subordinated) debt is subordinated to, but used in conjuction with, senior debt. Junior debt is inherently riskier, as senior debt holders are fully repaid before junior debt is repaid. Examples of junior debt providers are mezzanine funds and specialty finance companies. Junior debt provided by mezzanine funds typically contains warrants for equity in the company, thereby diluting the company’s equity for existing shareholders. Additionally, most mezzanine funds are looking for companies with at least $5 million in EBITDA seeking at least $5 million. However, certain specialty finance companies will provide completely non-dilutive junior debt to companies with less than $5 million in EBITDA seeking less than $5 million.


While senior debt is often a cheaper source of capital, it is much harder to procure and will not always fill the company’s entire capital need. Senior debt providers have greater limitations with regard to providing flexible capital to growing companies. For example, most senior lenders will not lend against residual income streams, thereby limiting borrowing capabilities for MSPs / VARs and similar businesses. This is where junior debt fits in the picture. If a senior lender is unable to provide sufficient capital to satisfy the company’s funding need, then junior debt is commonly used to fill the gap.


How can your business use debt financing to help your growth plans?  Let’s look at some different ways Super G Capital has helped other MSPs / VARs execute on their growth strategy.


  1. MSP uses subordinated debt to meet an immediate working capital need when additional runway is needed beyond the availability from the senior lender.


The Client:


The Company is a leading provider of IT and communication services with a global footprint comprised of 1,000+ staff globally and operations centers in USA, Europe, India and Australia.  The Company was founded in 1993 in the Bay Area, and has a business model with long term contracts that generate recurring revenue streams from large corporate customers such as IBM and Cisco with major contracts running through 2020. The Company has two unique business segments—(i) “Professional Services” and (ii) “Collaboration.” The Professional Services segment provides internal IT solutions and is historically the core business. The Collaboration segment provides cloud-based communications solutions (i.e. enterprise call centers) and is an area of high growth.


The Situation:


The Company was actively trying to build the Collaboration side of its business to complement its people intensive IT solutions business, which largely entails providing internal help desk support to large companies. The Company saw an opportunity for growth and higher margin business through its Collaboration platform.  The Collaboration division was growing rapidly and required additional working capital beyond a formula-based credit line, as contracts take 3 months on average to begin cash flowing.  The senior lender was unable to stretch beyond their borrowing base, given the timing disconnect of signed contracts vs generation of eligible A/R collateral. This time lag created an opportunity for SGC to provide working capital to a growing company with an upfront capital need that their existing ABL could not meet. The Company had an immediate $1.6mm need for capital, which it was able to service over 12 months as new contracts started and cash flow normalized.


Due to the contracted recurring revenue, the team at SGC quickly got comfortable with the deal and provided a second lien $1.6mm term loan to the Company within 3 weeks. SGC partnered with the senior lender to customize a repayment schedule that was beneficial to all three parties.


  1. MSP uses debt to finance the growth of their company by acquiring a customer portfolio from a competitor.


The Client:


The Company began as a business focused on IaaS (Infrastructure as a Service). The Company is a provider of fully managed cloud solutions for businesses of any size and industry, allowing them to move applications and users to the cloud and eliminate time consuming and costly IT processes including updates, server maintenance and user management.


What began as a small side project started to build traction and quickly grew to $80k – $100k per month in revenues, at which point they raised their seed round and began focusing on expanding the company and services provided. The company averaged approximately $700k per month in revenues in 2016 and expect that to grow to $1mm+ per month in 2017. They have contracts with their customers ranging from 2 to 4 years in duration.


The Situation:


The Company had over 300 clients at the time, but discovered an opportunity to grow its client base. The opportunity came in the form of an acquisition that would add roughly 150 – 170 more clients. The transaction was the acquisition of IaaS clients from a competitor.


The Company grew from an idea to a business with over $1mm MRR operating in multiple countries. With managed cloud services experiencing exponential increases in demand, the market is hugely competitive. The Company’s target market is small to mid-market companies with 50 to 1,000 employees (with the vast majority being in the 50 to 100 employee range). The acquisition of customers from a competitor would result in an additional $500k per month.


The acquisition of IaaS clients from the competitor was time sensitive and required a short funding timeline to meet a hard-closing date. Two members of SGC’s executive team met with management to understand the business and synergies from the acquisition. SGC was quickly able to get comfortable with the deal and meet the funding timeline. From meeting the company to funding took only 3 weeks, and resulted in the successful acquisition of the customer portfolio.


  1. MSP uss debt capital to refinance existing debt to improve their working capital positi


The Client:


Glowpoint, Inc [NYSEMKT: GLOW] is a managed service provider of video collaboration and network applications.  Glowpoint sets up, manages and supports videoconferences for enterprises that have a need for business communication services.  The Company offers videoconferencing as a cloud-based service, and as an on-premise solution leveraging the customer’s existing video infrastructure.  Glowpoint also provides network services to its customers that ensure traffic of video, data and Internet.  Both videoconferencing and network services are contracted for periods of up to three years and are offered on a monthly subscription basis providing over $1mm in MRR.


The Situation:


Glowpoint had an existing debt facility with a senior lender, but wanted to restructure its debt. The Company needed a total of $2.2mm in additional capital to refinance its existing debt, which would reduce its monthly debt service. Bridge Bank became the new senior lender, and SGC was able to partner with Bridge Bank to provide the total financing need.


Based on Glowpoint’s service contracts and high levels of MRR, the team at SGC was able to provide a $1.1mm second lien loan to the Company. SGC’s unique position to provide second lien debt allowed Glowpoint to receive the additional capital it required to recapitalize and lower its monthly debt service costs.


About Super G Capital:


Super G Capital (SGC) is a boutique alternative lender specializing in businesses with monthly recurring revenue (MRR) . SGC was founded by entrepreneur Darrin Ginsberg to provide non-dilutive capital to other entrepreneurs seeking to grow their business. The SGC team is able to move quickly to close a deal and often funds in just a few weeks.  SGC specializes in first and second lien/subordinated loans.  Super G’s second lien/subordinated loans complement existing and new credit facilities, working in cooperation with and subordinate to commercial banks, asset based lenders, and factors.  For companies with an existing credit facility, SGC’s subordinated term loans help avoid cash-shortages and enable companies to execute on their sales initiatives, invest in marketing and fund acquisitions while remaining in compliance with their respective senior lender.