Alternatives When You Need Cash in a Pinch

Since the financial crisis, small businesses have struggled to obtain standard loans. Thanks to investor risk aversion, stricter legislation, and overall economic uncertainty, many traditional lenders have become more particular about their loans.

Although the environment has eased slightly in recent months, loans can still be hard to come by. As Kenneth Walsleben, a professor at the Whitman School of Management at Syracuse University, told the New York Times last year, “The days of yesteryear when you could go to your corner bank are over. Small, emerging, growing businesses have few traditional sources to turn to.”

As a result, many alternative strategies began taking center stage — mezz loans, SBA-backed loans, and peer-to-peer loans. Still, other lending strategies have gained momentum as the capital gap remains unfilled. In addition to energy efficiency financing and sale leasebacks, deal professionals have been offering unique and innovative alternative lending options for small businesses and portfolio companies alike.

The Growth of Supply Chain Financing

One lending strategy offered by Axial Member Nancy Halwig of UPS Capital is a form of supply chain financing. “UPS’ global asset-based lending solution is a very traditional senior debt capital solution that encompasses lending against domestic accounts receivable and domestic inventory,” explained Halwig. “What makes it different is we go beyond the norm by also including inventory in transit, as well as some foreign inventory and credit insured foreign accounts receivable.”

She continued, “UPS creates and holds the documents needed to make sure the goods are titled to the borrower. It then uses its information systems to track shipments maintaining control of the goods.This extra layer of accountability is comforting to many banks and we help companies get more access to senior debt capital.”

This access to specialty senior debt can be appealing for a business owner trying to finance signifiant growth or a large order. The capital is especially good, according to Halwig, “for companies that may have had a hard time getting senior debt capital for goods moving through their supply chain.” Rather than giving up equity in order to raise the capital needed for growth, smart businesses are finding other ways. As Halwig explained, many firms are “especially eager to optimize profitability and minimize the amount of equity they need to deploy an investment.”

The Return of Subordinated Loans

Axial Member Matthew Cohen of Noble Lending Group has sought to alleviate the tight lending environment by offering “short-term, subordinated loans of up to $350,000.”

While the loans are relatively small, they can be valuable for businesses needing capital yesterday. “The loans are particularly attractive for small business owners that have a need for a quick infusion of capital,” explained Cohen. “The banks are still tight and the requirements of many asset-based lenders can be high for many businesses. Instead of requiring the expensive, lengthy due diligence process, the documentation requirements are pretty low and we typically fund within 3 business days.” However, like most junior debt without collateral, the loans can be on the expensive side.

Beyond a simple injection of capital to keep a business going, Cohen has seen the loan arrangements help in the process of raising larger funding rounds or selling a company. “These loans can be extremely valuable for due diligence or initial stages of an acquisition,” explained Cohen. “For example, if a company cannot pay the due diligence fees, it could bridge to afford the audits, appraisal reports, etc. Or, while a private equity firm transitions the company from an old lender to its own, there may be the need for a short-term loan to boost liquidity.”

Have you used alternative financing in your own business or have you seen other businesses use alternative financing? I’d love to hear your experiences in the comments below.