Alternative Lending Solutions

More banks are partnering with specialty financing companies.

Almost all businesses at some point need working capital, whether short term or long term. And commercial lenders are partnering with specialty financing companies, realizing they are not in competition with them, and it’s actually a winning situation. The customer is happy and thankful to have capital to grow – becoming more bankable – and the bank cultivates its customer relationship.

There are a variety of alternative commercial lending solutions including non-profit organizations that typically offer lower rate loans under $50,000, while the others below offer larger lines at higher rates (risk-based), but less than private equity.

Private Equity Investor and Lender – This investor expects some combination of input on management roles, personnel placement, and/or board seats. The investor will wait longer for a financial recovery, but could move faster if there are performance problems or pressure to fix and sell to maximize their return. The lender takes more risk, expects higher returns and will ask for a structure that allows him or her to convert to equity if loan conditions are not met.

Merchant Cash Advance – This offers businesses a lump sum payment in exchange for a share of future sales primarily from credit cards. These are best suited for business-to-consumer companies. Payback periods typically range from 3 to 12 months.

Non-Bank Lender – International/ Domestic – This investor does not invest in equity or take equity from the business, has no business control and offers robust financing options including:

  • Accounts Receivable (A/R) Factoring – Purchase of A/R providing immediate cash flow with advance rates ranging from 80 percent to 90 percent.
  • Asset-Based Lending – Funding secured by business assets (A/R, inventory and equipment) and is generally for companies with sales greater than $10 million.
  • Purchase Order – Business has a purchase order that exceeds its ability to be funded by a bank credit line. An irrevocable letter of credit is issued by finance the company to the vendor to pay 100 percent of product cost.
  • Trade Credit – Business has utilized most, if not all, of its bank credit line and needs additional inventory for growth. The finance company purchases inventory on behalf of the business, provides payment terms from 7-90 days and takes a second UCC position.

There is no one size fits all for borrowers and lenders. Banks often provide referrals to alternative commercial lenders, since there is no threat and the partnership allows businesses – bank customers – opportunities to grow and become bankable.

About the Author: Michael Banasiak is owner and managing director of Liquid Capital Express, a specialty commercial financing company. He can be reached at 732-223-2290.