Where To Turn When The Bank Says No – The Rise of Alternative Financing Products

By Mark Borkowski

Asset-based lending and other alternative finance products like P.O. financing and factoring are available when conventional financing is unattainable. If you are a small to medium sized business and have a need for a Line of Credit from $250,000 to $15 million and the bank says no, Bob Blades, Principal of Liquid Capital Corporate Finance Inc., is the type of person who may be able to provide assistance. Blades’ career has spanned 35-plus years in the financial services industry specializing in assisting entrepreneurial companies that are unable to obtain the financing they need for growth, turnaround, leverage buyouts and management buyouts. If your company has assets to leverage such as accounts receivable, inventory, equipment and real estate, an asset-based lender can help.

Conventional sources of finance rely on the borrower’s history (how long in business), their general financial health including profitability, positive cash flow and debt service coverage. If any one of these items do not meet the bank’s criteria, then most likely conventional financing will be unavailable.

All businesses go through positive and negative cycles. Take a positive cycle: “Your business is growing exponentially. Demand for your product is overwhelming. You have the assets; the Accounts Receivable and Inventory, but the Bank will not increase your line of credit as your equity base is insufficient to keep your leverage ratio within the Bank covenant.” Leverage is not an issue with an asset-based lender. If the assets are adequate and can be appraised to determine value, an asset-based lender will provide the needed working capital. They will advance against the value of the assets taken as collateral thus providing the working capital needed to grow.

Now look at a negative situation. Blades commented, “Your business just lost a major customer that represents 30% of your annual revenues. Not your fault. Your supplier decided to cut you out as the distributor and ship direct reducing their costs.”

Your infra-structure, staffing costs, and other overheads are in place for the higher volume. You cannot shrink overheads and downsize head count fast enough before operating losses pile up. You now have negative EBITDA and are offside the Bank’s covenants. You are in Special Credit. Notwithstanding all the positive years with the Bank, the relationship has soured and you are told to find financing elsewhere. Your first approach is to seek another Bank for support. They also say no. The alternative – call an asset-based lender, who will look at your financing needs differently.

More due diligence on asset values is determined before they enter into a commitment. The liquidation values of assets are determined and an in-depth understanding of the financial position of the company is completed to understand the present circumstances. Losses and red ink are tolerated as long as the asset values cover the loans outstanding on a formula basis. A great deal of emphasis is also placed on Management’s ability to overcome the present financial crisis and work their way back to profitability. Close communication and management between the asset-based lender and the borrower will be required during the term of the contract.

When financing with an asset-based lender reporting requirements are usually more stringent than conventional lending. Industry standards on working capital advances require a borrowing base certificate to be completed on a weekly basis as a minimum to include margin advances up to 85% of eligible accounts receivable less than 90 days and up to 85% of eligible net orderly liquidation value (NOLV) of Inventory. These advance rates usually provide increased borrowing capacity compared to conventional bank financing.

In managing the cash cycle the borrower deposits all daily accounts receivable collections in a blocked bank account at any chartered bank in Canada controlled by the asset-based lender who sweeps this account daily and applies the proceeds to your loan to keep the daily balance at their minimum. As new invoices are generated and inventory is received, a borrowing base certificate is completed for the asset-based lender to provide fresh cash back to you.

The more rigorous reporting actually disciplines borrowers into managing their cash requirements more effectively. This most often creates a better managed company. In many cases the borrower would prefer to stay with the asset-based lender at the end of the contract as the financial strength of their company is increased and the disciplined reporting allows for a more fluent business model.

Mark Borkowski is president of Mercantile Mergers & Acquisitions Corp. Mercantile is a mid-market mergers & acquisitions firm. Contact Mercantile at www.mercantilemergersacquisitions.com