The Challenge: Traditional Bank Lenders usually don’t like funding businesses during periods of variable cash flow or unpredictable collateral – e.g., periods of very high business growth, or on the flip side, reduced operating performance.

The Solution: Non-Bank (Alternative) Lenders specializing in asset based lending or those that provide short term bridge loans can often look beyond the credite nebancare of a transitional period to fill a company’s funding needs until the business is able to return to a traditional lending relationship.

Key Considerations for Borrowers:

Cash is King: Focus on the cash availability and debt service of the alternative loan, not the interest rate
Do the Rewards Outweigh the Cost of Capital?: If the benefit of the taking on the new business is greater than the cost of the capital, high interest rates may be well worth it
Plan Your Exit: Develop a clear plan at the outset to move back to a bank from an alternative capital source
Bank Lenders don’t like lending money to businesses when cash flow and/or collateral is in flux, for example:

Example A: A business goes through a heavy growth spurt causing either a significant inventory buildup that requires additional working capital financing, or creating a period with uncertain future cash flows and perhaps inadequate collateral coverage depending on the cash conversion cycle; or
Example B: A business experiences a difficult operating period due to, for example, an operational restructuring, a sales force realignment or miscalculating the scope of a major project- creating negative cash flows or earnings
In such circumstance like these, a bank lender may reduce available funds (e.g., increase the reserve in a borrowing base or carve out specific collateral), ask for additional collateral or simply ask the company to find another lender.

Non-Bank Lenders are often willing to look beyond the turbulence of a transitional period to understand and structure around the real risks in order to get comfortable providing the necessary capital

Alternative lenders are structured to lend into periods of uncertainty – they usually have greater flexibility to tailor their loans to:

Provide additional growth capital during periods of rapid expansion, not penalizing a business for investing as may traditional lenders
Fund a business in the early stages of a demonstrated turnaround, much earlier than when a traditional lender would lend
Alternative lenders also provide more flexible terms (cash debt service, amortization, loan maturity, covenants) and cash availability than do traditional lenders, and for this they charge higher interest rates.