Alternatives to Bank Financing

by Jeff Wright

Economists continue to express concern that there are warning signs of a Syndicated Lendingslowdown. Rising interest rates are expected to continue throughout 2019. The general opinion is that a recession will likely occur by year end, lasting into 2020. Obtaining bank financing will become more difficult as underwriting requirements tighten, meaning business owners and management must stay ahead of the curve to manage cash efficiently. It will be increasingly important to have financing readily available to ensure that companies are able to take advantage of opportunities as they arise.

Reasons a Bank May Say No

1) Limited operating history
2) Poor credit scores of the principle owner(s)
3) Turnaround situation of company
4) History of operating losses
5) Weak balance sheet with high leverage or negative net worth
6) Business is conducted in a down industry
7) High concentration with one debtor

Banks need to be convinced that the loan will be repaid in full. They will want to see profitability and positive cash flow to confirm the borrower’s ability to service its debt. It can be frustrating when the business owner believes he is on the right track to profitability and growth, yet lacks support from the lender due to a slowing economy and stricter underwriting standards. The reasons may make sense to the borrower but does not solve the need for working capital financing.

Alternative Sources of Financing

Once the business owner has exhausted personal savings and that of family and friends, alternative sources of financing are needed. Third party investors, such as angel and venture capital groups, invest in companies with a unique product or service that show potential for significant growth and returns. When obtaining financing from one of these groups, it is likely that some ownership interest and control of the business will be given up in return. Since the due diligence period can take up to six months and must be complete before a deal is finalized, this option does not solve the immediate need for cash.

A purchase order lender can be a source if the borrower has POs in hand but cannot finance the purchase of the inventory or pay the overhead necessary to get the product to market. The perceived performance risk in funding the PO through completion means the rate may exceed 20%. Once invoiced, these loans are typically repaid by financing from an asset-based lender or factor.

An asset-based lender like Hitachi Business Finance can leverage a business’s assets to provide immediate availability to the money needed to fund growth. Ownership and control remains 100% with the shareholders and management team. Primary focus is placed on the quality of the collateral and character of the management team rather than the length of time in business and the balance sheet. Without immediate access to cash, new opportunities may be missed or an existing customer could be lost to a competitor. Asset-based financing allows the borrower the opportunity to fund immediate cash needs or take on new jobs that otherwise may have to be turned away due to lack of working capital. These incremental sales will more than cover the additional cost of funds.

About Hitachi Business Finance

Hitachi Business Finance can take care of the short term working capital needs of small and middle market companies, allowing management to focus on business growth. For more information on asset-based lending and factoring as a resource when the banks say no, visit our website at www.hitachibusinessfinance.com.

Jeff WrightJeff Wright has been with the Hitachi team since 2006 and contributes more than 30 years of experience in the banking and commercial finance industry. He is currently responsible for business development in the Midwest region and works with small businesses and their trusted advisor network to provide factoring and asset-based lending services. He can be reached at jwright@hitachibusinessfinance.com or (248) 259-3749.

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