and Non-Bank Financing
By Tom Klausen
The good news is that, despite the tight credit environment,
there are many alternative and non-bank financing options available
to companies that need a cash infusion, whether it’s to beef up
working capital or help facilitate growth.
However, the bad news is that business owners often shy away
from non-bank financing because they don’t understand it. Most
owners simply rely on their banker for financial information and
many bankers (not surprisingly) have only limited experience with
options beyond those offered by the bank.
To help ease some of the fear that owners often have of
alternative financing, here is a description of the most common
types of non-bank financing. There are many struggling businesses
out there today that could benefit from one of these alternative
If a business has financial challenges, full-service factoring is a
good solution. The business sells its outstanding accounts
receivable on an ongoing basis to a commercial finance company (also
referred to as a factoring company) at a discount—typically between
2-4 percent—and then the factoring company manages the receivable
until it is paid. It is a great alternative when a traditional line
of credit is simply not available. There are a number of variables
to a program, including full recourse, non-recourse, notification
Here, a business can sell just one of its invoices to a factoring
company without any commitment to minimum volumes or terms. It
sounds like a good solution but it should be used sparingly. Spot
factoring is typically more expensive than full-service factoring
(in the 5-8 percent discount range) and usually requires extensive
controls. In most cases, it does not solve the underlying lack of
working capital issue.
A/R financing is an ideal solution for companies that are not yet
bankable but have good financial statements and need more money than
a traditional lender will provide. The business must submit all of
its invoices through to the A/R finance company and pay a collateral
management fee of about 1-2 percent to have them professionally
managed. A borrowing base is calculated daily and when funds are
requested an interest rate of Prime plus 1 to 5 points is applied.
If and when the company becomes bankable, it is a fairly easy
transition to a traditional bank line of credit.
This is a facility secured by all the assets of a company, including
A/R, equipment, real estate and inventory. It’s a good alternative
for companies with the right mix of assets and a need for at least
$1 million. The business continues to manage and collect its own
receivables but submits an aging report each month to the ABL
company, which will review and periodically audit the reports. Fees
and interest make this product more expensive than traditional bank
financing, but in many cases it provides access to more capital. In
the right situation, this can be a very fair trade-off.
Purchase Order (PO)
Financing: Ideal for a business that has a purchase order(s) but lacks
the supplier credit needed to fill it. The business must be able to
demonstrate a history of completing orders, and the account debtor
placing the order must be financially strong. In most cases, a PO
finance company requires the involvement of a factor or asset-based
lender in the transaction. PO financing is a high-risk kind of
financing, so the costs are usually very high and the due diligence
required is quite intense.
The message I am trying to convey is simply that financially
challenged business owners should not be afraid to consider
alternative or non-bank financing options. It’s a fairly simple
matter to learn what they are, how much they cost and how they work.
Alternative financing is a much better option than facing the
challenges of growth or turnaround alone. It is a known fact that
the vast majority of business failures are due to a lack of working
capital—but it doesn’t have to be that way.
With a better understanding of these different types of
non-bank financing, you’ll be in a better position to decide if they
might be the answer to your financing challenges.
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