Our guest blog this week comes from Michelle Goerdel, President, Biz Loan Link.
There are a many different ways that companies can finance growth or other changes that companies can turn to when it can’t qualify for bank financing. These differ depending upon the company’s financial history, its current balance sheet and its cash flow. All are more expensive than bank financing both through fees and interest but may provide more flexibility than bank financing as well.
1) For young high growth companies there are lenders that will fund the growth of newer companies in different ways including percentage of revenue instead of interest. These lenders are funded themselves by private investors. These lenders will do creative types of financing and security, sometimes using warrants (options to buy shares in the company at a set price) as part of the security pool.
2) Companies that are not quite “bankable” but have available accounts receivable or inventory fit into another tier of lending- asset based lending (ABL.) These lenders loan at varying percent of AR and inventory value depending upon the quality of the overall balance sheet and the quality of the company’s receivables and inventory and will sometimes do equipment loans as well but only as an adjunct to a line of credit. They will often lend at a higher loan to value than a bank on the company’s receivables or fund equipment that might not be considered desirable collateral by the banks.
3) One tier below ABL is factoring, where the lender purchases the company’s invoices at a discount to the amount. Rates for these are even higher than ABL lines and are for companies that are a bit more out of compliance than ABL will accept. These lenders will loan only on accounts receivable and care mostly about the viability of the customer not the borrower.
4) Hard money lenders tend to congregate in the real estate area, loaning a certain percentage on commercial or residential property (the latter usually only for investors) for 3 years or less at a time. These are used a lot by contractors, house flippers, and those businesses that can’t qualify for regular commercial mortgages. There are a few private lenders that are doing other forms but these tend to be for super high interest, high risk lending.
5) Companies can also get funding from Community Capital Development groups. These nonbank lenders receive a combination of funds from various government agencies and at times receive funds from banks that invest in these groups to meet their Community Reinvestment Act requirements. These loans are often guaranteed and/or the funding is shared by government agencies (SBA, USDA for example).