Yesterday Billboard Insider ran an article which discusses trends in the lending markets. The lending markets are important because many out of home companies rely on debt to finance capital expenditure and acquisitions. Debt has 3 benefits:
- It allows you to grow faster than you can using your own funds.
- It is cheaper than equity. Out of home interest rates are 6-12% versus a cost of equity for most out of home companies of 15-25%.
- It adds a trusted advisor to your business, especially if your lender understands out of home advertising. You can’t go wrong with Alerus Financial, Billboard Loans, Formetco Digital Financing, Stark Capital Solutions, Verde Outdoor Capital or YESCO Financial Solutions.
Debt has 3 drawbacks:
- Too much debt can cause bankruptcy or the liquidation of your company. Billboard Insider thinks a sustainable level of debt is 4-5 times cashflow (EBIDTA). Beyond that interest and principal payments reduce the cash which is available to grow your business and can lead to financial distress, especially during a recession.
- Loan covenants limit what you can do (e.g. capexp, your salary, distributions, acquisitions).
- Debt slows down your ability to move fast because your loan covenants may require your bank to consent to large acquisitions or distributions. It also can take a while to be an increase in your loan.
What’s your company’s approach to financing. Take our anonymous poll below.
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Send any thoughts you have on using debt to grow your company to davewestburg@billboardinsider.com and we’ll run a followup article.
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