Overcoming the Challenges of Securing New Capital
By Alex Sanginario, Managing Partner, NMP Capital Solutions
In the aftermath of the last recession, many companies are finding it difficult to obtain the financing they need to support new growth opportunities. This is especially true for lower-middle market companies (businesses with revenue between $3.0M and $100.0M).
Having depleted their cash reserves, inventories, and even workforces, in order to survive the recession, they now face the serious challenges of being able to finance their return to profitability. Now, with new opportunities to regrow their businesses, owners are experiencing the hard reality that growth consumes capital and, without a recent track record of positive cash flow and profitability, new capital is hard to come by.
Many companies, which enjoyed "A" credit ratings prior to the recession, have lost their "A" credit ratings, due to economic challenges during the recession. Banks and financial institutions focus their lending on large companies and companies that have demonstrated profitable growth while maintaining "A" credit ratings in the last couple years. Small to medium sized businesses which have been unable to maintain profitability, and have fallen below the "A" credit rating, are now often not qualifying for any type of bank financing.
"The days of yesteryear when you could go to your corner bank are over," suggests Kenneth Walsleben of Syracuse University, in his NYTimes.com article (August, 2012). "Small, emerging, growing businesses have few traditional sources to turn to. You have to get a little creative." The need to be creative in structuring loans for non "A "credit business has created an opportunity for non-traditional lenders to find different ways to underwrite loans.
Such non-traditional lenders are providing capital to small private companies and trying to close the capital gap that exists in the current marketplace. A recent article titled "Borrowing without Banks" in CFO magazine (October, 2013) quoted, "Private capital providers [i.e. non-banks] specialize in lending to companies with less than $100M in revenue that don't have access to the public debt markets. Such borrowers are often overlooked by traditional lenders … Now that lending to corporations is back in vogue, non–bank capital providers are again underwriting loans that banks can't or won't. Specifically, they are providing capital to middle markets and small companies that bank's credit committees flag as too risky."
There always have been non-traditional lenders who have provided capital to companies when banks were not willing. However, under the current economic conditions, such lenders are playing an even bigger role in providing capital to small and medium sized companies to regrow their businesses. As stated by Brock Blake in Forbes.com (October 21, 2013), "New alternative loan products prove to be valuable for small business owners and the alternative lenders start to capture market share." With the banks still taking a conservative approach to lending, the creativity among the non-traditional lenders seems to be increasing. These lenders are trying to innovate new ways to help small business owners get the capital they need.
There are a variety of types of capital that non-traditional lenders can provide to small and medium sized companies, such as senior and subordinated debt, mezzanine loans, asset based loans, project financing, purchase order financing, and equipment and buyout financing, to name a few. Such finance companies are also more flexible with their lending practices and are open to lending to companies with less than perfect credit. They are willing to rely less on past performances and more on a company's ability to service the proposed debt and on available collateral.
The advantage that banks have is that they can charge the lowest interest rates in the marketplace for loans, since their capital comes from depositors. The non-traditional lenders usually charge a higher interest rate than banks, to compensate for the higher risk they take in lending to less than "A"credit borrowers. Although the rates may be higher from non-traditional lenders, they are able to provide more flexibility to the borrower than banks. For example, these lenders can respond quickly to capital needs, often closing in 30 days, while banks can take up to 90 days, since they do not have to go through multiple levels of approvals. Additionally, the loan terms can often be less restrictive and may not require personal guarantees. They can also be more creative with their lending practices, since many of them get their funds from institutional investors and are not governed by the same rules and regulations as banks.
Banks are always the best source of debt financing, if you qualify, because of the low cost of capital. However, in the current economic environment, when small to medium companies are unable to access bank capital, there are now options available to obtain the financing they need. The cost of capital from non-traditional lenders may be more expensive, but they are able to provide creative solutions for companies that may not otherwise be able to access capital to sustain or grow their businesses.
Please stay tuned for my next article, sometime after the holidays, which will discuss the various types of non-traditional lender financing in detail.
Alex Sanginario is the Managing Partner of NMP Capital Solutions, which focuses on helping lower-middle market companies to secure the capital they need to support growth. She can be contacted at: email@example.com