How Small Businesses Find the Right Mix of Financing with Flexibility
Non-bank lenders are increasingly offering new creative financing options for smaller businesses. Find out how to secure the right mix of financing for your business.
The financing options available to smaller businesses have steadily been increasing. Traditionally, small to lower middle market companies—those with $5 million to $100 million in annual revenues—relied on an asset-based revolving line of credit together with a term loan, depending on the nature of their business. Generally, the revolving line of credit was secured on accounts receivable and inventory, and the term loan on plant and equipment.
This traditional financing arrangement, while still useful for many smaller businesses, is no longer as readily available from commercial banks. Increasingly, however, non-bank lenders are stepping in to provide financial products that offer new levels of flexibility. Their offering now actually represents an expansion on traditional lending to smaller businesses.
The Rise of Cash-flow Lending
Traditional asset-based financing works well for businesses with large inventories, receivables, or fixed assets. However, it is fairly limiting for many kinds of small businesses, especially service companies that are light on assets but may have strong enterprise value. Non-bank lenders now provide cash-flow term loans to such businesses, even if they have less than $5–7 million in trailing EBITDA, which used to be the threshold for such loans.
High-tech companies are a perfect example of businesses that may have strong cash-flow margins but not a lot of assets. Such companies may also be in their early stages, and therefore not have many years of historical performance. The banks are hesitant to lend to such businesses. Non-bank lenders, however, will now provide valuable working and growth capital to these businesses based on their enterprise value, including their ability to generate cash, rather than on the value of their business assets if liquidated.
Finding the Right Mix of Financing
All too often, what small businesses require is a mix of financing, intelligently structured to meet their specific needs. Financing for smaller companies used to be limited. But there are now interesting new mixes available from non-bank lenders. For ultimate flexibility, a small company needs to locate the right mix of specialty lenders.