Alternative Funding: Where To Go When The Bank Says No

Jan 21, 2021 | Cash Management

Banks choose not to lend for a number of reasons, from uncertainty about your business or industry to discomfort about your solvency. Fortunately there are a number of ways to get alternative funding for your business outside of conventional banking relationships.

Options for Alternative Funding

Banks offer traditional financing at typically the lowest available interest rates. They’ll typically require the borrower to achieve certain performance-based goals or offer some collateral in exchange for the loan. Alternative funding options often work in similar ways, but at a higher interest rate or with different requirements of the borrower. Some options include:

  • A private investor may loan at a higher interest rate or in exchange for some equity in your company.
  • A mezzanine lender offer loans at high interest rates or with a hybrid of debt and equity. These are often short-term or emergency loans.
  • A private equity company will infuse money in exchange for significant stock or equity. Private equity companies typically work to quickly increase value of a company so they can sell it at a profit, so this kind of engagement assumes you’re ready to hand over some control.

There are also options for micro lending or crowdfunding, both of which rely on technology and peer-to-peer relationships rather than banking or corporate lending. In micro lending many people will lend small individual amounts, accumulating into larger loans. Crowdfunding essentials pre-sells a product that might only be in research and development. The “buyer” is essentially lending a small amount in good faith, but at the risk of their product never actually being developed. Rather than repayment, crowdfunders get early access, discounts, or special incentives in exchange for their early purchase or “investment.”

Knowing Why The Bank Said No

Private investors, mezzanine financing, and private equity still have much in common with conventional banking relationships, including having an understanding of your business, revenue models, profitability, reporting and more. This is why it’s valuable to understand why a bank might turn down financing – the same issues might come up again when seeking alternative funding.

Any investor or lender will want to understand your business plan, your industry, and your need for cash. They’ll want forecasts and projections. Where a bank might be reluctant to lend to an unproven startup, a venture capitalist or private investor will be excited to invest early in hopes of generating large returns – but they’ll still want to see a sound business being developed.

Often when a bank says no it’s simply because the borrower was unprepared or unconvincing with out of date records, poor demonstration of financial or business planning, or weak financial forecasts. Any investor will want the same, so it’s important to be prepared.

The CFO’s role in funding relationships

The right CFO offers a lot of strategic value as a parter in financial relationships. Your CFO should have a clear perspective on your business’s vision, goals, and strategies to achieve goals. Combining this with accurate financial reporting and an understanding of what lenders and investors like to see and are looking for in relationships is a potent mix of possibilities for you. Banks, investors, and alternative funders are looking for opportunities they can feel confident in, and it’s the borrower’s job to cultivate that confidence. A CFO should be a key driver in developing transparent, productive, healthy financial relationships.

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