Funding Alternatives When Banks Say No
If you’re a typical dealer of windows and doors, you need a $1.5 million line of credit for every $10 million in business. Accordingly, if your revenues are $5 million, a $750,000 LOC is what’s required. This level of funding assures you’re not chronically cash hungry and have funds for early-pay discounts, inventory, strategic investments or even a recession.
Finding a bank is its own challenge, and then there’s an added hurdle: what if the bank says no? There are some alternative sources of cash that can help in such a situation.
Mezzanine Debt: Mezz debt is a category of capital that sits between secured senior debt, which is secured by assets and equity (e.g. stock in the company). Mezz debt should be complementary to a LOC and you typically access a revolving credit facility or a term loan. The debt provider is subordinate to your existing bank line in the event of a bankruptcy. Accordingly, the cost of money will be high and the mezz debt provider will require warrants in your company. Providers include Merion, Caltius and Digital Partners.
Short-Term Loans: There’s a crowded field of providers for short-term loans. They offer quick cash infusions, but watch for hidden fees and high interest. Some advertise rates “as low as 9.9 percent,” but after origination fees and depending on length of the loan, the effective rates can run much higher. Providers include OnDeck, Kabbage and CAN Capital.
Receivables Financing: Also known as debt factoring or invoice financing, this approach offers advance funding on invoiced accounts. You can submit invoices selectively, but the effective cost can be high. Providers include BlueVine and Fundbox.
Credit Management: Also complementary to a LOC, credit management providers fund businesses upfront on all B2B sales and protect from credit risk. They also offer operational support, collections and customer service. The cost of trade credit runs 1.5 to 3.0 percent per transaction. Providers include BlueTarp.
Any of these options could be right for you, based on funding needs, what you’re willing to pay and how quickly you need the cash. But fully investigate the pros, cons and relative costs of each option.
Have you explored alternate funding sources? Review the results of this week’s poll, post a comment or email your thoughts on the subject.
We don't need alternative funding
We don't want to pursue these types of options
We haven't but will now consider it
Yes, and it worked out great
Yes, but it did not help our situation