Funding alternatives when banks say “no!”

If you’re a typical dealer of windows and doors, you need a $1.5 million line of credit (LOC) for every $10 million in business. Accordingly, if your revenues are $5 million, a $750,000 LOC is what’s required. This level of funding assures you’re not chronically cash hungry, and have funds for early-pay discounts, inventory, strategic investments, or even a recession.

Finding a bank is its own challenge, and then there’s an added hurdle: What if the bank says, “No”?

Here are some alternative sources of cash:

Mezzanine debt

“Mezz debt” is a category of capital that sits between secured senior debt, which is secured by assets, and equity (e.g. stock in the company.) Mezz debt should be complementary to a LOC, and you typically access a revolving credit facility or a term loan. The mezz debt provider is subordinate to your existing bank line in the event of a bankruptcy. The cost of money will be high, and the mezz debt provider will require warrants in your company. Providers include: Merion, Caltius, Digital Partners.

Short term loans 

There’s a crowded field of providers for short-term loans. They offer quick cash infusions, but watch for hidden fees and high interest. Some advertise rates “as low as 9.9%,” but after origination fees, and depending on length of the loan, the effective rates run much higher. Providers include: OnDeck, Kabbage, CAN Capital.

Receivables financing

Also known as debt factoring or invoice financing, this approach offers advance funding on invoiced accounts. You can submit invoices selectively, but the effective cost can be high. Providers include: BlueVine and Fundbox.

Credit management

Also complementary to a LOC, credit management providers fund you upfront on all B2B sales and protect you from credit risk. They also offer operational support, collections and customer service. The cost of trade credit runs 1.5% to 3.0% per transaction. Providers include: BlueTarp.

Any one of these options could be right for you, based on your funding needs, what you’re willing to pay and how quickly you need the cash. But fully investigate the pros, cons and relative costs of each option.

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