“I think there are a couple different situations that might result in a different answer,” Land said. “If you’re really using the balance of equity and debt purely as a tool to achieve the best financial return, and you or your fund or partners have additional cash that is available to put into the business. I think you can operate that on a pretty tight margin and try to get the best economic outcome.”
Land said that things might be different if there were a situation where a lender is unable to sell the loan and is forced to keep it on the books.
“If it’s more of a fixed fund, and you know that if there’s a covenant violation or a buyback of a loan, or there’s a situation where you can’t sell those loans, I think you have to build in a cushion,” Land said. “That has to be looked at on an individual kind of company-by-company basis. But if you want to feel comfortable that if you lose one funding source, or there’s some event that causes a need for cash, that you have some cushion.”
Figuring out how much cash you need
Marcia Kaufman (pictured top center), CEO of Bayport Funding LLC, said it’s important to figure out exactly what your company needs in the event of an emergency.
“Liquidity is your own money, your equity, your profit in your company,” Kaufman said. “You’ve got to figure out how many months do you need, just in case. Or years, just depending on what your performance is in case there’s an event.”