SME financing through private debt #1 : an essential financing tool for SMEs
Private debt, already widely used in Anglo-Saxon countries, is booming. Adapted and simple to set up, they appear to be an excellent complement to bank loans and equity financing, and a very good tool for diversifying sources of financing. Provided that relatively simple eligibility conditions are met, private debt is a real growth driver and is destined to become an essential means of financing for SMEs. Instructions for use.
Private debt or bond financing: Which companies are eligible?
Private debt financing involves the issuance of securities. Joint stock companies (SA, SAS, SCA), even newly created, are therefore the first companies to be eligible, subject to relatively simple conditions (fully paid-up share capital, asset/liability verification if the company has been in existence for less than two years). In principle, the decision is taken by the company's administrative organ (board of directors) or by the manager(s), unless otherwise provided by the Status. The LLC (SARL) can also use this type of financing, but under stricter conditions: it must have been in existence for 3 years, meet certain size and seniority criteria (3 years) and make an information document and a notice relating to the conditions of issue available to subscribers. The decision is taken by the general meeting of shareholders.
What types of projects are likely to be financed by private debt?
All types of projects can be financed through the use of private debt, such as:
- Asset financing
- Organic growth
- R&D projects
- Intangible investments
- Equity transactions (exit of shareholders, OBO, MBO,...)
- External growth operations.
What are the main features and benefits?
Private debt financing is a medium to long-term financing solution, which leads to an issue of securities by the company being financed, after a relatively rapid implementation. The rates applied, depending on the financing, vary between 5 and 12%, which is a cost, certainly higher than that of the bank loan, but less than that linked to equity financing. Investors (institutional or not) provide financing at the end of a securities issue contract, setting all the conditions relating to repayment in particular, and providing, if necessary, guarantees (for example on real estate assets, inventories, etc.).
Compared to bank debt financing, it has the advantage of allowing an ultimate repayment of the amount of the financing (only the interest being repaid before maturity), and of covering needs not financed by banks, such as intangible investments, research and development projects or purely capital operations. It also offers shareholders a real alternative to equity, much cheaper and above all non-dilutive.