For Mark Hangen, CEO of Easy Ice, the answer was simple. “When evaluating options, a CEO needs to think beyond just the bottom-line cost of capital.
For us, the right lending partner was a BDC because Saratoga Investment Company recognized that my business was best served by re-investing my free cash flow to grow. The amortization schedule was appropriate to my operating plan and financial covenants were tailored to my growth, which gave us sufficient runway to grow into the as sets we were financing.”
A bank would have wanted to give Easy Ice, which rents commercial ice machines to businesses nationwide, a collateralized loan, which would have been tricky since Easy Ice is the only company with a national presence that gives a 100 percent lifetime guarantee for a commercial ice maker. For a flat monthly fee, a restaurant, hotel, commercial office space or other facility can rent an ice machine that Easy Ice maintains 24/7.
To date, Easy Ice has installed more than 3,200 ice machines nationally, which represent an investment in excess of $10 million. The firm has the industry’s only 24 x 7 x 365 call center capability and the largest network of service techs and backup ice providers in the country. The herculean task for a bank would have been to audit widely spread icemakers with an average cost of $3,200, something a BDC making cash flow loans need not do.
BDCs are focused on a business’ value proposition, its industry competitors and customers. For smaller companies, banks tend to be more focused on hard assets and liquidation value. They want to be covered from an enterprise value perspective because they are at 2X to 3X EBITDA in addition to asset coverage. Conversely, a BDC will spend more time underwriting, but will invest 4X to 5X EBITDA in some cases.
A BDC can do that because it doesn’t have to contend with the bureaucracy and massive regulations of larger bank organizations. Since they lend deeper in the capital structure and often take equity stakes, a BDC’s managers have a more profound understanding of portfolio companies. They tend not to have hard and fast rules like bigger banks. So, while CEOs pay a bit more to a BDC for flexibility in loan terms and covenants, they generally get more value from BDCs as more reliable and enabling financial partners.