The challenge: Traditional bank lenders generally do not like to finance businesses during periods of variable cash flow or unpredictable guarantees, for example, periods of very high business growth or, on the other hand, reduced operating performance.

The solution: Non-bank (alternative) lenders who specialize in asset-based loans or those who provide short-term bridging loans can often look beyond the turbulence of a transition period to meet the financing needs of a business until that the business can return to a traditional loan relationship.

Key considerations for borrowers:

  • Cash is king: Focus on the availability of cash and debt service of the alternative loan, not the interest rate
  • Do the rewards exceed the cost of capital ?: If the benefit of taking on the new business is greater than the cost of capital, the high interest rates may be worth it.
  • Your exit plan: Develop a clear plan early on to return to a bank from an alternative source of capital

Bank lenders do not like to lend money to companies when cash flow and / or collateral are constantly changing, for example:

  • Example A: A business is going through strong growth that causes significant inventory build-up that requires additional working capital financing or creates a period with uncertain future cash flows and perhaps inadequate collateral coverage based on the cash conversion cycle; gold
  • Example B: A company experiences a difficult operating period due to, for example, an operational restructuring, a realignment of the sales force, or an incorrect scope of a major project, resulting in negative cash flows or earnings.

In circumstances like these, a bank lender may reduce available funds (for example, increase the reserve on a loan base or create a specific collateral), request additional collateral, or simply ask the business to find another lender.

Non-bank lenders are often willing to look beyond the turmoil of a transition period to understand and structure the real risks in order to feel comfortable providing the necessary capital.

Alternative lenders are structured to lend during periods of uncertainty; They generally have more flexibility to tailor their loans to:

  • Provide additional growth capital during periods of rapid expansion, without penalizing a company for investing as traditional lenders can.

  • Financing a business in the early stages of a proven turnaround, long before a traditional lender lent

Alternative lenders also offer more flexible terms (cash debt service, amortization, loan maturity, covenants) and cash availability than traditional lenders, and therefore charge higher interest rates.

Key considerations when borrowing from a non-bank (alternative) lender:

Companies turn to non-bank or alternative lenders when traditional lenders do not provide the necessary capital or bank terms are too restrictive. Here are several key considerations when evaluating an alternative loan:

  • Cash is more important, so focus on required cash debt service (principal and interest), not the interest rate on the loan
  • Often times, the total debt service of an alternative loan at a higher interest rate will be less than the total service of the debt of a traditional bank loan because the principal payments are much lower.
  • If the benefit of taking on the new business exceeds the cost of borrowing, the high interest rates can be worth every penny.
  • Have a realistic plan for going back to a traditional lender before taking out a bridge loan
  • Make sure the loan provides a cash cushion if the transition takes longer or costs more than expected
  • Ask yourself: does the lender understand my business and appreciate me as a customer? The answer must always be yes. If not, find a lender who will