Part 1, “State of Capital in Austin — The Debt Side”
With 53 active banks, non-bank lenders and mezzanine providers in the Austin area, the state of capital on the debt side is quite fluid (no pun intended). The market seems to be moving at light speed as it appears new providers are eager to get to one of the hottest markets in the entire country to place debt. In this blog post, we’ll explore the lay of the land as it relates to the debt side of the equation while we explore the equity side in Part 2, “State of Capital In Austin — The Equity Side.”
With the rapid growth of the market and entrepreneurial spirit that exists in the Austin area, it’s no surprise debt providers are clamoring to tap into this market. Debt, which at a high level, takes the form of senior debt and mezzanine debt, is an important part of any company’s balance sheet. By way of background, senior debt is traditionally offered by commercial banks and is called senior because a bank is generally taking a first lien position in the assets of the company it’s financing. Mezzanine, often referred to as junior debt, may or may not take a lien position in the company’s assets, but brings with it a higher cost of capital given the increased risk the mezzanine provider is taking. Often, the difference in the cost of capital can be as much as 8–10% when comparing a “senior” lender with a junior lender. It’s also important to point out that both types of capital are often needed to support a transaction as banks tend not to lend more than 80% of a real estate transaction or 3–4x EBITDA in a cash flow transaction. To the extent a transaction requires capital over and above where a bank can lend, it’s often necessary to involve a mezzanine lender to fill the gap.
As it relates to the state of capital in the Austin area, particularly on the debt side, I can vouch for the fact that the best opportunities to place debt are often wildly competitive and require a lender to put its best foot forward with respect to pricing. Further, it seems each opportunity in the market, whether it be for a manufacturing company or a technology company or anything between, typically has 3–5 banks actively evaluating the opportunity. This serves to drive pricing down and substantially optimize credit structures and terms in the favor of the borrower.
Clearly, it’s beneficial for a founder or entrepreneur to take advantage of the favorable terms offered by banks and other types of lenders, but it’s also important to understand when to utilize the capital banks offer. Often, entrepreneurs and founders gravitate to cheaply priced debt just given the cost of capital not truly understanding where it makes sense to leverage bank debt. It’s important to note banks are often lending money on thin spreads, sometimes as low as 2% over cost, which means banks cannot take a lot of risk (not to mention the regulation that exists in the industry). That is — risk that’s usually present in early-stage venture companies or in instances where there is not a lot of collateral that could be liquidated to pay a loan back if something goes wrong. Further, while the cost of capital is higher, the same principles generally hold true for junior lenders who are getting a higher return commensurate with their risk.
In conclusion, it’s safe to say the debt capital markets are very much in favor of the entrepreneur and founder. It is, however, still important to understand when to utilize debt and under what conditions it makes sense. Starting with an understanding of how senior and junior lenders make money (and the spreads they are often deriving) often provides insights as to how and when they will participate.
About The Author
Allan is CEO and Co-Founder of PaidUp (getpaidup.com), a financial technology company launched in 2014 designed to handle bookkeeping, accounting, payroll and club dues management for elite volleyball clubs across the U.S. Allan and his co-founder, Felipe Fernandes, launched the startup in Austin, TX and are currently supporting many of the largest volleyball clubs across the U.S. managing nearly $10MM in payments on behalf of these clubs since inception.
Allan is also an accomplished banker with a nearly twenty year track record working in the capital markets supporting privately-held business owners and sponsor backed companies. Allan started his career with Comerica Bank in Dallas in 2001 where he spent the first five years of his career as an analyst and corporate banker. Allan joined Bank of Texas in Dallas in 2005, working primarily in corporate banking and private wealth management where he supported privately-held business owners and their underlying middle-market businesses. In 2013, Allan and his family moved to Austin to join the commercial banking team of BBVA Compass later joining Regions Bank in 2017 to build the Central Texas region as Market Executive.
Austin is home to Allan, and his wife of eighteen years, Jennifer. Allan and Jennifer have three active boys, Will, Alex and Sam and their family enjoys spending time together outdoors, running, cycling, camping and enjoying live music. Allan’s family is also passionate about giving back to the Austin community and work hard to support the homeless through Mobile Loaves & Fishes (an Austin based, 501(c)(3) and Freshies, an organization he and his family launched in 2014.
