Stay committed in your decisions, but stay flexible in your approach.
Looking for funding from a bank is a well-trodden process. However, whilst the banks provide a useful source of affordable finance and their ‘off the shelf’ product works for many businesses, sometimes a company needs a bespoke product. This flexibility is especially useful if you are looking for a partner to fund your business through a period of rapid growth.
There are many differences between banks and alternative lenders but this commentary will demonstrate how the latter’s flexibility can be better suited to a business.
Structure and Price: Due to their low cost base, banks are able to provide cheaper forms of finance compared to the alternative finance market. However, this comes at the cost of flexibility. Whilst the alternative finance market has a higher cost base, often reflected in pricing, the smaller and more dynamic lenders are able to provide a bespoke solution that accommodates the company’s financial needs. Private Lenders offer long-term capital, and loans often have interest-only periods.
Leverage: The term ‘leverage’ in this case refers to the EBITDA multiple that a funder uses to calculate the maximum amount that they are willing to lend. Strong and consistent financial performance helps a funder gain comfort with higher leverage. Having said that, the alternative finance market is more willing to lend at higher levels. Our previous experience indicates that banks will lend up to 2x or sometimes 3x leverage, whilst some alternative lenders will provide between 3x and 4x.
Term: As a result of the nature of their mandate, alternative lenders prefer to keep their capital invested for long periods of time, typically 4-7 years. In contrast, a similar term loan from a bank would last 2-3 years. However, it is worth noting that whilst a loan from an alternative lender has a longer term, in most cases the borrower has the option to exit the agreement early at a fixed cost.
Mandate: The covenants set by a bank, similar to the loan structure that they provide, will be rigid and follow strict ratios and metrics. Tighter covenants will have a higher risk of being breached, especially in seasonal businesses or those with uneven revenues. Alternative lenders set bespoke covenants that allow for fluctuations in revenue or profit, permitting the business to perform at its highest potential throughout the year.
This does not discredit the range of products that banks critically provide to many businesses but simply suggests that there are lesser known, flexible solutions out there. This is exemplified through the need for less restrictive covenants, a more adjustable repayment profile, or a simple requirement for more capital; all of which the alternative finance market provides. Accordingly, it can supplement or replace what is currently proposed by banks.